Texas economy grapples with slowdowns in retail, manufacturing sectors

The Texas economy is showing some signs of slowing down, most noticeably in manufacturing and retail.

That's the gist from two new reports from the Federal Reserve Bank of Dallas, which show declines in manufacturing, the service sector and in retail activity across the state in August.

The reports point to continued supply chain issues, rising prices and hiring challenges across the board for those sectors of the economy.

More:Austin housing market 'normalizing,' tilting back in buyers' favor, latest numbers show

However, all sectors expressed optimism of a turn around.

For manufacturers, the August index for general business activity, which measures broader business conditions, improved 10 points from July's reading but remained in negative territory at -12.9, according to the Dallas Fed survey.

“Demand continued to decline, as the new orders index posted a third consecutive negative reading, and perceptions of general business activity worsened,” said Emily Kerr, Dallas Fed senior economist. “Hiring continues to be a bright spot, and upward pressure on prices eased further as many manufacturers noted an improvement in supply-chain disruption."

Manufacturers said they are continuing to hire and that getting needed supplies is improving.

"We're still seeing difficulty acquiring certain sizes and types of raw metals," one respondent replied to the anonymous survey. "Fortunately, we’ve been able to substitute with other materials after recommendations from our customers. Certain chemicals for elastomer manufacturing are becoming a problem. Some of our suppliers are saying they can’t accept any new orders for the year and that they won’t be able to supply anything until first quarter 2023."

Austin's unemployment rate held steady at 3.1% in July, according to the Texas Workforce Commission. The Austin metro area's unemployment rate remains below Texas, at 4.3%, and national rates at 3.8%

“Job creation is actually increasing at a steady rate in our region,” said Melanie Flowers, board chair for Workforce Solutions Capital Area. “From 2016 to 2021, jobs increased by 16% in the Austin metro, and this change far outpaces the national job growth rate of 1.8%.”

Central Texas is currently undergoing a manufacturing boom, led by electric automaker Tesla, which has made Austin its headquarters. The company has opened a $1.1 billion manufacturing facility in southeastern Travis County, where it has begun production of its Model Y electric SUVs.

In addition, tech giant Samsung picked a site near Taylor to build a $17 billion semiconductor manufacturing facility. According to documents filed with the state, Samsung is considering building 11 new chipmaking facilities in the Austin area over the next two decades, a move that could lead to nearly $200 billion in new investment and create more than 10,000 jobs by the technology giant.

“Hiring continues to be a bright spot, and upward pressure on prices eased further as many manufacturers noted an improvement in supply-chain disruptions," Kerr said. "Looking ahead, expectations for demand and output six months from now are positive, though uncertainty remains elevated.”

Struggles in retail, service sector

Meanwhile, the Texas service sector — which includes retail and hospitality-related-businesses as well as technical services — expanded at a slower pace in August, according to the Texas Service Sector Outlook Survey.

“Revenue growth moderated and labor market indicators suggested a weaker pace of hiring,” said Christopher Slijk, Dallas Fed associate economist. “Price and wage pressures further eased from highs earlier in the year. Perceptions of business activity worsened as outlook uncertainty remained elevated.”

The service sector accounts for nearly 70% of the state's economy and employs about 8.6 million workers, according to the Dallas Fed.

“The Texas service sector expanded at a slower pace in August, as revenue growth moderated and labor market indicators suggested a weaker pace of hiring,” Slijk said. “Price and wage pressures further eased from highs earlier in the year. Perceptions of business activity worsened as outlook uncertainty remained elevated.”

The Dallas Fed survey of the service sector includes a retail section, focused on information from respondents in retail and wholesale businesses. The retail survey found sales deteriorated in August.

"Retail sentiment remained pessimistic, with the company outlook and general business activity indexes in deeply negative territory," the report said.

Retailers are feeling the pressure on both hiring and a jump in operational expenses.

"I can't raise prices as fast as they are increasing for my company," one respondent said. "If I did, it would hurt my business. We are making less profit now."