March 01, 2011

Economics Group

Special Commentary
Eugenio J. Alemán, Senior Economist
eugenio.j.aleman@wellsfargo.com ● (704) 715-0314
Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com ● (704) 383-5635
Tyler Kruse, Economic Analyst
tyler.kruse@wellsfargo.com ● (704) 715-1030

Texas Economic Outlook: March 2011

Texas Continues to Lead the Recovery
Texas continues to lead the U.S. economic recovery in a number of key areas, including job
growth, capital investment, population growth and exports. The Lone Star State has added more
than 230,800 jobs over the past year on a December-to-December basis and the unemployment
rate has remained well below the national rate throughout the financial crisis and recession. The
stronger labor market relative to other states has proven to be a powerful drawing card for new Texas continues to
businesses and new residents. Texas consistently ranks as one of the top states for new and lead the U.S.
expanded corporate facilities and has attracted more new residents during the past decade than economic recovery
any other state. in a number of key
areas.
While Texas has held up better than most other large states, the state is clearly not immune to the
problems plaguing other regions of the country. While lower than the national rate,
unemployment has remained persistently high for the past two years, which has caused credit
quality to deteriorate and weighed heavily on state and local finances. Housing and commercial
real estate also face significant headwinds, though to a lesser extent than most other parts of the
country.
Budget Time in Texas
State budget issues have flooded national headlines for months now. Several of the country’s
largest state governments face prodigious budget gaps for the upcoming fiscal year. Sadly, Texas
was no exception, with estimates of the budget gap reaching $25 billion. The Legislative Budget
Board’s (LBB) proposed 2012—2013 Biennial Budget features a $31 billion drop in total state
spending for the two-year fiscal cycle to close the expected gap between expenditures and
Over 70 percent of
revenues.12 This cuts the overall 2012—2013 All Funds budget to $156 billion from a budgeted
the drop in
$187 billion, equivalent to a 16.6 percent decline from the 2010—2011 biennium.3 The
expenditures will
Comptroller’s estimate for biennial revenue totaled $177.8 billion for the 2012—2013 budget cycle
be from federal
with $76.9 billion in state income, $70.2 billion in federal income and roughly $30 billion in fees,
funds.
interest and other income.4 While total state taxes should net Texas $76.9 billion, this number
falls to $72.2 billion when adjusted for the $4.3 billion shortfall for the 2010—2011 budget cycle.
So where does the $31 billion cut in All Funds expenditures come from? Roughly 70 percent, $21
billion, of the cut reflects a precipitous drop in federal funds allocated to the state. The largest
category of federal spending in the Texas budget is in Health and Human Services, which the LBB
proposes to reduce by 33.8 percent compared with the previous budget cycle. Since its enactment

1
The Legislative Budget Board, in coordination with the governor’s office, is responsible for preparing a
thorough budget recommendation to be considered by the state legislature in the fiscal year prior to the
new budget cycle.
2
Texas’s Legislature only meets once every two years, which means that each budget must span the
entire biennium.
3
In Texas budget parlance, All Funds refers to the sum of General Revenue, General Revenue-Dedicated,
Fees and Interest as well as federal funds.
4
The Texas Comptroller of Public Accounts is responsible for independently preparing a revenue
estimate based on a forecast for growth in the state over the course of the upcoming biennium. The
revenue estimate is prepared in January of the fiscal year immediately preceding the new biennium.

This report is available on wellsfargo.com/research and on Bloomberg WFEC

 Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

in February 2009, the American Recovery and Reinvestment Act (ARRA) has allocated $7 billion
in federal funds to Texas for use in state healthcare spending (in addition to FMAP matching
funds), but this temporary boost will unwind by the beginning of the new budget cycle.5 As
indicated by the LBB’s proposed budget, Texas does not intend to fill the holes left by the
unwinding of ARRA and additionally intends to curtail state revenue funded healthcare spending
7.7 percent. Education received a similar boost from ARRA funds, about $6.3 billion, and will see
the second-largest decline in expenditures in terms of overall spending as well as federal
allocations. Cost-cutting measures include a proposed cut of nearly 9,000 state jobs, which would
return state employment to levels seen in the 2008—2009 biennium. Job cuts will likely be felt
heaviest in education, roughly 2,000, and public safety and criminal justice, where the LBB
envisions trimming more than 3,000 jobs.
The sheer size of the LBB’s proposed spending and state employment adjustments have caused a
Cost-cutting stir inside and outside Texas, but the net effect of the budget, if passed without amendment,
measures include a would be to bring the size of Texas government back to levels seen before the recession. In
proposed cut of addition, state revenue spending is due to fall by $9 billion, but the matching funds formula
nearly 9,000 state employed by the federal government compounds every dollar of fiscal consolidation by states.
jobs. Both state and federal spending increased rapidly in the past two biennia to help insulate the
economy from the recession, but many lawmakers viewed the expansion of government as a
temporary response to the financial crisis and not a secular trend toward bigger government.
Although the need to dampen the effects of the recession has faded, Texas’ population continues
to expand vigorously and demand for public services such as healthcare, public safety and
education has grown significantly since the 2006–2007 biennium. Returning the size of
government to prerecession levels will place added pressure on existing public services and
threatens to ignore significant demographic changes in the state. We expect a healthy debate over
the LBB’s proposed biennial budget over the next few months. For a more-detailed analysis look
for our upcoming special on Texas budget issues.
Figure 1 Figure 2
Texas All Funds Biennial Budgets Texas Government Jobs
Estimates, Billion of Dollars Recommendations Begin in 2012, Thousands of Jobs
$80 $80 90 90
2010-2011 2009
2012-2013 80 2010 80
$70 $70
2011
70 2012 70
$60 $60
2013
60 60
$50 $50
50 50
$40 $40
40 40
$30 $30
30 30

$20 $20
20 20

$10 $10
10 10

$0 $0 0 0
Health Public Ed. Higher Ed. Public Bus. Dev. Gen. Gov. Other Government Health Education Public Safety Business Other
Services Safety Development

Source: Legislative Budget Board and Wells Fargo Securities, LLC

Recent Economic Conditions

The Texas economy, after avoiding the worst of the U.S. housing market crisis and recovering
faster than the rest of the nation, started to slow at the end of 2010, according to the Metro
Business Cycle Index (MBCI) published by the Federal Reserve Bank of Dallas. Growth for some
large metropolitan areas in the state has basically flattened, while others have moderated from
their relatively strong initial pace following the Great Recession.

5
FMAP stands for Federal Medical Assistance Program, a program where the federal government
matches state funds spent on Medicaid by a formulaic matching level. The level of federal funding is
determined by the state’s per capita income.

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Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Total nonfarm employment increased by 230,800 jobs in 2010 on a December-to-December basis

after falling by 354,200 jobs during 2009, according to the latest information from the Texas
Labor Force Commission. Texas nonfarm employment bottomed out in September 2009 and rose
in 11 of the following 15 months. Most of the monthly drops were due to the unwinding of
temporary Census jobs. The private sector numbers provide a better assessment of the labor
market and show gains in 14 of the past 15 months. The total gain for both series, however, may
slightly overstate the bounce back in the state’s economy. Nonfarm employment declined sharply
in December 2009, making for a sharper year-to-year comparison. Nevertheless, we believe the
year-to-year numbers give a more accurate assessment of the labor markets since the 2010 year-
end number is 97,000 jobs above the average level of employment for 2010.
While job growth bounced solidly in 2010, the pace of hiring lags behind previous recoveries.
Texas is not alone in seeing a sluggish recovery in job growth. Hiring has lagged in most states
and the nation has added back only a tiny fraction of the jobs lost during the downturn. Moreover,
Texas actually saw fewer job losses in the highly cyclical manufacturing sector, with factories
eliminating approximately 100,000 jobs during the Great Recession. By contrast, manufacturers
eliminated 169,000 jobs during the 2001 downturn.
There were heavy job losses in other sectors, however. The construction industry eliminated close
to 100,000 jobs during the Great Recession, compared to 23,000 during the 2001 downturn. The Texas
Trade, transportation and utilities saw employment fall by 68,000 during this recession, which construction
was slightly worse than the 52,000 jobs lost in the prior recession. The financial sector lost industry
20,000 jobs in the Great Recession. By contrast, financial services continued to add jobs eliminated close to
throughout the previous recession. Professional and business services providers shed 100,000 jobs in the
73,000 positions versus 41,000 in the 2001 recession. Meanwhile, the information sector lost past recession,
33,000 jobs compared to a 48,000 loss during the 2001 recession. The rest of the sectors were net compared with just
contributors to employment growth during both recessions. Education and healthcare continued 23,000 in the 2001
adding jobs throughout the past two recessions. Most of the growth has been in healthcare recession.
services, which is expected to continue to grow in the decades to come as the U.S. population
continues to age.
The state’s largest MSAs—Austin, Dallas, Fort Worth, Houston, and San Antonio—all came out of
the recession early in 2010, but are faring somewhat differently. Austin is leading the way while
the Dallas MSA has basically stagnated after a relatively strong start.
The Austin metropolitan area saw nonfarm employment turn positive in the fall of 2009 and
enjoyed modest job gains through the middle of 2010. Census hiring boosted payrolls in the late
spring and summer months, but both private sector and government payrolls hit a wall late last
summer. Modest job gains in education and health services, leisure and hospitality and the all-
important government sector, helped produce a net gain of 15,100 jobs this past year, on a
December-to-December basis. The 2.0 percent increase marks a significant improvement from
the 2.4 percent drop in 2009. While education and healthcare and the leisure and hospitality
sectors will probably remain strong in 2011, the state and local government sector poses a
significant downside risk as the state copes with a widening fiscal deficit. Government
employment in Austin accounts for around 22 percent of overall nonfarm payroll employment,
compared to 17 percent for the state as a whole. Any negative news coming from the public sector
will be bad news for Austin’s economy.
While public sector cutbacks present a real risk to Austin, the private sector appears to be poised Public sector job
for stronger gains. Austin’s high tech sector is benefiting from an influx of companies from cuts are a real
California and Asia. Growth in the semiconductor and solar industries holds great promise for the threat to the Austin
region and the weaker dollar will likely help attract additional investment to the region. employment
picture.
The Dallas-Fort Worth area saw modest job gains during 2010, but gains were very uneven.
Nonfarm employment rose 1.3 percent for the year, producing a net gain of 36,200 jobs on a
December-to-December basis. Hiring has picked up most in the service sector, paced by steady
gains in professional and business service and education and healthcare services. By contrast,
construction remains a major drag and employment in the financial services sector remained

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 Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

essentially unchanged for the year. The weakness mostly reflects declines in residential
development.
We expect hiring to pick up slightly in the Dallas-Fort Worth area this year as financial services
and leisure and hospitality employment sectors start growing again. Our biggest concern this year
is, again, the public sector, which added 7,300 jobs in 2010, but is expected to shed jobs this year.
While government employment in the Dallas-Fort Worth MSA only represents 13.8 percent of
total employment compared to more than 20 percent for the Austin MSA, its contribution to
growth in 2010, combined with the likelihood of severe public belt tightening in 2011, makes us a
bit cautious about the hiring outlook.
Houston emerged from the recession a little earlier than most other Texas metropolitan areas.
After posting strong gains in the early part of 2010, economic conditions moderated considerably
during the second half of the year, according to the MBCI. Nonfarm employment finished the
year with a paltry 0.5 percent gain on a December-to-December basis. Hiring has been held back
by continued job losses in construction and financial services, as well as heightened uncertainty in
the deepwater oil drilling sector.
The disappointing jobs numbers for Houston are a bit of a mystery. The usual suspects in the
Job growth in
goods-producing sector are actually doing relatively well. Hiring has picked up in the energy
Houston has
sector and manufacturing employment improved modestly over the course of the year. Layoffs in
gained strength in
construction have also slowed. Hiring in the service sector appears to have been held back by
recent months, but
weak income gains and the ongoing struggles in the region’s housing market. The result has been
remains
continued layoffs in the financial sector and unusually weak job growth in retail trade and
disappointing.
professional services. Fortunately, the pace of job growth gained some momentum over the
course of the year. Higher energy prices might also open up a few more opportunities for the
region’s all-important energy sector.
San Antonio has posted modest, yet consistent gains since May 2010, even though growth had
been relatively weak coming out of the recession, according to the MBCI. However, in terms of
employment, the San Antonio economy weathered the crisis somewhat better than other large
Texas metros, thanks largely to the region’s large military presence. The recession still hurt,
however, and many San Antonio businesses are still scrambling to get back on their feet. After
losing 20,600 jobs in 2009, San Antonio added 7,100 jobs this past year on a
December-to-December basis. While modest improvement is evident in most industries, the
largest gains came in just two areas, government and retail trade. San Antonio does not face the
same constraints on government employment that some other Texas metro areas do, as more of
San Antonio’s government presence is on the federal side, much of which is tied to the large and
growing military presence in the region.
We expect job growth to pick up in 2011, with stronger gains in healthcare and professional
services leading the way. Hiring in retail trade and the region’s important leisure and hospitality
sector also seems poised for better days.
The Export Sector in Expansion
Texas exports were hit hard by the slowdown in international trade during the recession, but
surged in 2010, surpassing record highs reached back in 2008. Texas total exports surged
25.4 percent in 2010 and moved firmly into expansion, exceeding prerecession highs by
Total Texas exports 2.7 percent. Texas manufactured exports rebounded strongly 23.9 percent for the year.
surpassed Commodities exports have surpassed prerecession highs in both monthly and yearly terms
prerecession highs according to the December trade report, boosted by a continued bull market in soft commodities,
in 2010. such as soybeans, wheat, corn and cotton. Despite the recession, Texas manufactured exports are
up roughly 80 percent since 2000 and commodities exports have nearly tripled over the same
period. Texas’ dynamic export sector has expanded faster than the rest of the nation’s since 2000,
with the state’s share of national manufactured exports growing to 16.8 percent in 2010 and state
commodities exports accounting for 9.5 percent of the U.S. total. Exports have remained a crucial
driver of the Texas economy in the past decade, fueling strong gains throughout the state and
helping support more than 13.6 percent of the state’s nominal gross product in 2010.

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Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

A significant portion of Texas exports remains concentrated in petroleum and petroleum-related

products, where demand has cooled since the price of oil dropped from record heights during the
summer of 2008. Nationally, crude exports have risen considerably over the same period last
year, but foreign demand for drilling machinery and equipment fell, with respective exports
falling ten percent in 2010 from 2009. Higher oil prices tied to the ongoing unrest in the Middle
East will likely fuel demand for petroleum products, drilling equipment and expertise, providing a
lift to the state’s exports this year. Outside of the petroleum-related sector, Texas exports continue
to trend upward. For example, computer and computer-related products account for the largest
single category of Texas exports, roughly 20 percent of the total value of exports in
2009. Non-petroleum-related manufacturing exports such as civilian aircraft and parts, motor
vehicles and parts, and electrical machinery have grown their share of total Texas exports since
2006 and will likely contribute significantly to 2011 exports as developing economies continue to
experience robust growth.
Figure 3 Figure 4
Texas Exports Texas Exports
Average Monthly Real Exports, BLS Export Deflator 2000=100 November Year-to-Date Share of National Total
16 16 20% 20%
Manufactured Commodities
Non-Manufactured Commodities
14 14

16% 16%
12 12

10 10
12% 12%

8 8

8% 8%
6 6

4 4
4% 4%

2 2

0 0 0% 0%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10

Source: U.S. Dept. of Commerce, Federal Reserve Board of Dallas and Wells Fargo Securities, LLC
While crude prices have settled to a historically moderate level, a wide gamut of factors has
conspired to boost soft commodity prices to historically high levels. Cotton prices, for instance,
are at their highest level since cotton began trading on an exchange in 1870. Fortunately, Texas Texas cotton
farmers were well-positioned to take full advantage of the soft commodity bull market, with total production
2010 estimated cotton production reaching 8.05 million bales, or 74 percent more than 2009. expanded by 74
Soybean, corn and wheat production all posted significant gains over last year, with most per-acre percent in 2010,
yields higher than in 2009. While the boom has been beneficial for farmers, soaring soft taking advantage
commodities prices have sparked food inflation fears across the world as developing nations face of record prices.
increasing domestic demand and decreasing international supply. Higher food prices will likely
cut into Texans’ budgets as well, but state incomes should receive a lift from the bumper year and
the resulting spillover from spending.
The strong growth in emerging markets should also drive growth in Texas’ sizeable capital and
manufactured goods sector. Although Canada and Mexico, both NAFTA partners, consume over
40 percent of Texas exports, demand from emerging nations, such as China and Brazil, has
continued to grow despite the global slowdown. The “two speed” global recovery will highlight the
importance of Texas’ trade with booming emerging economies and dampen the effects of
lackluster growth in developed nations such as the United Kingdom and Japan. Luckily, Texas’
largest developed trading partner is Canada, where growth has been strong relative to other
developed nations. The continuing trend toward a more diversified export portfolio, both in terms
of products and consumers, will add momentum to export growth and state growth as a whole.
It Just Comes Naturally: The Texas Energy Industry
Once upon a time, a report on the Texas energy industry would cover just the oil and natural gas
sectors, but the Texas energy landscape is changing, both figuratively and literally. Today, it is not
uncommon to see wind turbines next to the oil derricks that dot the horizon in West Texas. While

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 Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

popular misconceptions abound, the truth is that Texas is a national leader in production and
utilization of alternative and renewable sources. Wind, in particular, has taken a front seat, with
two of the world’s largest wind farms located in north-central Texas. Unfortunately, wind power
in Texas is a long way from achieving grid parity in the medium term without continued
government subsidies, but alternative fuels of all kinds benefit from unique advantages in Texas.
Texas is the only state with its own power grid, which makes adapting to new sources of
technology easier. In addition, Texas utility companies only provide power on the Texas grid,
which eliminates the need for federal regulation, giving lawmakers in Austin, in conjunction with
local utility companies and their respective self-regulating organizations, the ability to design
unique solutions to state’s energy needs. For instance, the areas with the highest wind energy
potential in Texas lie along the Llano Estacado in the panhandle, but this area’s distance from the
core of the grid requires a substantial network of transmission lines to transport the energy
efficiently to the rest of the state. The Texas Public Utility Commission (PUCT) worked with utility
companies across the state to raise enough funds to begin adding additional transmission lines.
Since 2005, Texas has been keen on fomenting growth in emerging technologies inside state lines,
Texas has invested prompting the launch of the Texas Emerging Technology Fund (TETF). Since 2007, the TETF has
$40 million dollars invested $40 million in green energy companies and research within the state of Texas,
in alternative comprising nearly 15 percent of total awards for the period. A large portion of these grants were
energy technology for development of biofuels from algae and advanced battery technologies. In addition to direct
firms through investment programs, Texas offers a broad range of tax incentives for solar energy companies—an
TETF. effort to tap into Texas’s vast, untapped solar energy potential. It is estimated that one acre of
land in West Texas is capable of producing the energy equivalent of 800 barrels of oil a day. The
composition of Texas’ energy is changing rapidly with investments in green tech, with the hope
that backward linkages will bring green manufacturing jobs to the well-trained energy labor force
already located in the state.
While green energy is on the rise in Texas, the state still relies heavily on the oil and natural gas
sectors. The number of rotary rigs operating in Texas plummeted in 2009 as the state felt the
effects of the Great Recession and world demand for oil dropped off; however, in 2010, the rig
count rebounded strongly and should continue to rise with the surge in drilling permits issued.
Oil prices have yet to recoup levels achieved before the international financial crisis and we expect
them to hover around $100 a barrel for the year, which means growth in the oil industry should
progress solidly, although not at the fevered pace seen back in 2008. There was large-scale
concern that the BP oil spill and the subsequent drilling ban would damage Gulf oil production
and slow business in Texas’ sizeable refining sector, but, to date, the concentration of the current
administration has been on the eastern half of the Gulf. New drilling regulations will require every
exploration plan to demonstrate the capability to deal with a potential blowout or a “worst-case
discharge scenario.” In addition, an independent engineer must approve general well design as
well as specific casing and cementing designs, which is a substantial change from before the
Deepwater spill this past summer. The new regulations will result in more regulatory hurdles for
permit seekers and, in the near term, will slow the pace of permit approval and create some
uncertainty for companies interested in investing in offshore plays.
Horizontal and hydraulic drilling techniques have changed the Texas oil industry dramatically in
recent years. New techniques have allowed companies to access oil and natural gas in tight rock
formations that were previously considered impossible to develop. Texas’ proven natural gas
Low natural gas reserves have risen steadily over the past 20 years, but the pace of expansion has accelerated
prices are a mixed greatly since 2003. Producing wells followed suit as wellhead prices continued to climb; however,
blessing for the new storage and pipeline infrastructure, coupled with the strong expansion in producing wells,
Texas economy. began to put downward pressure on prices in 2009. While natural gas production has expanded,
the demand for natural gas in Texas remains subdued and has actually fallen since 2000.
Although the overexpansion in productive capacity is a major drag for natural gas producers, low
prices seen in the past two years have been a boon to local industry. Many Texas utility companies
have begun to replace highly pollutant coal with clean, cheap natural gas to power electrical grids,
especially to cool Texas homes during the scorching summers. Texas’ refinery and petrochemical
industry has begun to leverage low natural gas prices to gain a competitive advantage both

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Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

domestically and internationally. Utility and industrial natural gas prices remain well below
commercial and residential prices, which allow refineries to net dramatic savings in their energy
consumption heavy processes. Low natural gas prices remain a mixed blessing for the Texas
economy in the near term, but the state’s generous endowment of proven reserves will continue to
provide the nation’s number one energy consumer with a cheap, local and clean source of energy.
Figure 5 Figure 6
Texas Oil and Natural Gas Texas Drilling Permits and Rig Count
Yearly Well Completions, Thousands Thousand of Drilling Permits
30 30 60 1800
Gas Wells Completed: 2010 @ 4.1 Thousand Drilling Permits Issued: 2010 @ 18.0 Thousand (Left Axis)
Oil Wells Completed: 2010 @ 5.4 Thousand Average Rotary Rig Count: 2010 @ 659 (Right Axis)
25 25 50 1500

20 20 40 1200

15 15 30 900

10 10 20 600

5 5 10 300

0 0 0 0
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Source: Texas Railroad Commission, Baker Hughes and Wells Fargo Securities, LLC

Home Sales Are Still Stuck in Low Gear

While home sales and new home construction held up better in Texas than they did nationally,
the state is still clearly dealing with the aftereffects of the housing boom. Home construction rose
relative to the state’s population near the top of the housing boom in 2005 and 2006, but the pace
never got quite as fevered as it did in many other parts of the country. Starts peaked in 2005 at
166,203 units and plummeted 62 percent to just 62,980 units this past year. Sales of existing
homes peaked in 2006 at 292,800 homes and fell 30 percent to 205,000 in 2010.
Lending tended to be more conservative in Texas during the boom years. The Lone Star State
learned about the hazards of too much leverage back in the 1980s real estate collapse and adopted
laws that made it more difficult for homeowners to tap the equity in their homes. The more
conservative lending environment dampened speculative activity during the housing boom, which
helped keep price appreciation in check. That said, pockets of overbuilding are clearly evident
along the Gulf Coast and in portions of nearly every major market. Inventories of homes are Texas learned its
slightly higher than they were a year ago, foreclosures have increased and prices have stagnated. lesson from the
1980s real estate
Home sales and new home construction were affected by the extension of homebuyer tax credits
boom and avoided
in 2010. The tax credits pulled home sales into the first half of the year and generally supported
the worst of the
prices. Sales collapsed around the middle of the year and have languished ever since. In addition,
recent housing
the controversy surrounding the foreclosure process curbed existing home sales further late last
bubble.
year. The supply of homes listed for sale also decreased slightly at yearend. Even with the drop,
however, there remains a 7.2 months’ supply of homes on the market, up from 6.3 months one
year ago.
New home construction also got a slight boost from the homebuyer tax credits. Permits for new
single-family homes were running ahead of their year-ago pace from November 2009 through
May of 2010, but have been running below their year-ago pace ever since. By contrast, apartment
construction gained momentum during the second half of the year. Permits for new multifamily
projects rose 7.7 percent in 2010, with nearly all of the gain occurring during the second half of
the year.
While activity remains depressed, Texas is holding up much better than most other major
markets. All four of the state’s large markets ranked in the top ten for new housing permits in

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 Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

2010, with Houston taking the top spot and Dallas-Fort Worth finishing second. Austin saw the
seventh-largest number of single-family permits and San Antonio finished with the ninth-highest
total.
The year should be the mirror opposite of 2010. The first half of the year is likely to remain
relatively sluggish, with sales being heavily influenced by foreclosure sales. Activity should pick
up in the second half of the year, as job growth accelerates and prices stabilize. Sales of existing
homes are expected to rise close to eight percent in 2011, while permits for new single-family
homes should rise around ten percent to around 70,000 units. Apartment construction should
strengthen further, helping boost multifamily starts at least 15 percent.
Figure 7 Figure 8
Texas Monthly Home Sales Texas Monthly Home Sales
Thousands, 12-Month Moving Average Thousands
26 26 26 26
2008
24 2009 24
2010
22 22
22 22

20 20
18 18

18 18

14 14
16 16

14 14
10 10

12 12
Texas Home Sales: Jan @ 16.9 Thousand
6 6 10 10
90 92 94 96 98 00 02 04 06 08 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Real Estate Center at Texas A&M University and Wells Fargo Securities, LLC

Commercial Real Estate Is Finding Its Footing

Demand for commercial properties improved over the course of 2010. Some improvement is
evident across all product categories in each of the state’s largest metropolitan areas. The most
The apartment dramatic gains have been in the apartment market, where modestly stronger job growth has led to
market is leading increased leasing activity. Occupancy rates have increased the most in Austin and Dallas, where
commercial real they rose 3.1 and 2.6 percentage points, respectively. San Antonio and Houston also saw gains.
estate gains in The rise in occupancy rates has led to a pick up in effective rents and helped fuel a buying spree in
Texas. apartment communities. Development activity is also increasing.
Office leasing is reviving a bit more slowly. Leasing activity increased during the second half of
the year, but much of that activity appears to be coming from firms taking advantage of a soft
market to upgrade their location. Overall vacancy rates rose slightly in Houston this past year,
with the entire rise occurring in Class B space. The Houston Realtors Association noted demand
for new Class A picked up over the course of the year, with positive net absorption recorded for
the past three quarters. Dallas is seeing a similar trend. Leasing activity has also picked up in San
Antonio and Austin.
Demand for industrial space has been even stronger, led by an upsurge in the logistics sector,
strong growth in the tech sector and increased international trade. Improvement is evident
throughout the state. Demand for warehouse and distribution space has been fairly strong
throughout the state, while demand for general industrial space and flex space has tended to lag.
All markets have seen improvement over the past year, with Dallas and Austin seeing the
strongest gain.
Retail leasing was surprisingly strong during the second half of 2010 and vacancy rates tightened
modestly in most markets. Unfortunately, we are seeing a renewed round of store closings, which
will likely put some large blocks of space back on the market. With little new construction in the
pipeline, however, vacancy rates should rise only modestly.

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Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

We expect demand for commercial real estate to continue to revive in 2011 and look for office and
industrial vacancy rates to fall modestly over the next few quarters. While apartment construction
appears set to ramp up this year, we see little prospect of any significant gains in office and
industrial projects. Sales of commercial properties remain brisk, however, and values have clearly
stabilized.
Figure 9 Figure 10
Austin Apartment Supply & Demand Dallas Office Supply & Demand
Percent, Thousands of Units Percent, Thousands of Square Feet
6% 4 25% 1,500

5% 2 24% 1,000

4% 0 23% 500

3% -2 22% 0

2% -4 21% -500

1% Apartment Completions: Q4 @ 268 Units (Right Axis) -6 20% Office Completions: Q4 @ 0 SF (Right Axis) -1,000
Apartment Net Absorption: Q4 @ 1,111 Units (Right Axis) Office Net Absorption: Q4 @ 138,000 SF (Right Axis)
Apartment Vacancy Rate: Q4 @ 5.3% (Left Axis) Office Vacancy Rate: Q4 @ 24.6% (Left Axis)
0% -8 19% -1,500
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Source: Reis, Inc. and Wells Fargo Securities, LLC

9
Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Austin MSA Nonfarm Employment

Austin 12%
3-Month Moving Averages
12%
3-Month Annual Rate: Dec @ 0.3%

 Austin remains one of the more resilient

9%
Year-over-Year Percent Change: Dec @ 2.1%
Household: Yr/Yr Percent Change: Dec @ 2.2%
9%
economies in the country and continues to
attract scores of new businesses and residents.
Nonfarm employment grew 2.0 percent in 2010, 6% 6%

producing a net gain of 15,200 jobs. Austin’s

unemployment rate fell 0.2 percentage points 3% 3%

over the year to 6.8 percent in December.

 While job growth was relatively robust in 2010, 0% 0%

it was concentrated in two sectors, local

government, which added 5,700 jobs, and -3% -3%

leisure and hospitality, which added 5,100 jobs.

The former looks somewhat suspect and might -6% -6%
be reversed in 2011. The latter reflects the 92 94 96 98 00 02 04 06 08 10

opening of some new hotels in the region, which

will not likely be repeated this year. Aside from
these two areas, job growth is much more Austin MSA Unemployment Rate
Seasonally Adjusted
modest, with gains predominantly in 8% 8%
professional and business services, education
and health care and manufacturing. 7% 7%

 Austin’s housing market is showing some

6% 6%
tentative signs of stabilizing. Sales of existing
homes fell 4.3 percent in 2010 but sales in
5% 5%
December were running slightly above their
year ago pace and prices appear to be
4% 4%
stabilizing. Austin had a lean 5.6 months supply
of homes on the market at yearend and 3% 3%
apartment demand rose solidly last year.
 Austin should remain one of the more vibrant 2%
Unemployment Rate: Dec @ 7.1%
2%

economies in the nation this year. Technology 12-Month Moving Average: Dec @ 7.1%
spending is growing on a number of fronts, 1% 1%
90 92 94 96 98 00 02 04 06 08 10
including IT, semiconductors and alternative
energy. One risk is that public sector cutbacks
reduce state and local government payrolls. Austin MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
30 30
Single-Family: Dec @ 4,440
Austin MSA Population Growth Single-Family, 12-Month Mov. Avg.: Dec @ 6,026
In Thousands Multi-Family, 12-Month Mov. Avg.: Dec @ 1,544
70 70 25 25

60 60
20 20

50 50
15 15

40 40

10 10
30 30

5 5
20 20

10 10 0 0
90 92 94 96 98 00 02 04 06 08 10

0 0 Source: U.S. Department of Commerce, U.S. Department of Labor

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 and Wells Fargo Securities, LLC

10
Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Dallas-Ft.Worth MSA Nonfarm Employment

Dallas-Ft. Worth 10%
3-Month Moving Averages
10%
3-Month Annual Rate: Dec @ 2.0%
 Preliminary data show the Dallas-Fort Worth 8% Year-over-Year Percent Change: Dec @ 1.3%
Household: Year/Year Percent Change: Dec @ 1.5%
8%

area adding 36,700 jobs in 2010. Most of the 6% 6%

gains were in professional and business
services, education and health services and local 4% 4%

government. Manufacturing employment also 2% 2%

increased, pace by gains in the tech sector.
 The unemployment rate was essentially 0% 0%

unchanged over the past year, falling -2% -2%

0.1 percentage point from December 2009 to
-4% -4%
7.9 percent. The drop looks real, however, as
both employment and the labor force increased -6% -6%

solidly over the past year.

-8% -8%
 Dallas continues to attract significant numbers 92 94 96 98 00 02 04 06 08 10

of businesses. The semiconductor industry is

enjoying strong demand both domestically and
Dallas-Ft.Worth MSA Unemployment Rate
abroad. Significant investments have also been Seasonally Adjusted
made in highway and rail infrastructure in the 10% 10%
Unemployment Rate: Dec @ 8.2%
past few years, although there is little noticeable 12-Month Moving Average: Dec @ 8.3%
impact in the employment data.
 Housing is still enduring a bit of a payback from 8% 8%

the tax-credit induced buying during the first

half of 2010. Sales of existing homes fell
7.8 percent in 2010 and there is little sign of any 6% 6%
firming in demand. Apartment leasing picked
up in the past few quarters, reflecting stronger
job growth and continued population inflows.
4% 4%
 Dallas-Fort Worth should continue to post
modest gains in 2011. Strong growth in the tech
sector combined with a strengthening national
2% 2%
economy should continue to drive gains in 90 92 94 96 98 00 02 04 06 08 10
manufacturing and distribution. Rising energy
prices are also helping lift the energy sector. Dallas-Ft.Worth MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
75 75
Single-Family: Dec @ 10,980
Dallas-Ft. Worth MSA Population Growth Single-Family, 12-Month Mov. Avg.: Dec @ 14,472
In Thousands
Multi-Family, 12-Month Mov. Avg.: Dec @ 4,750
200 200
60 60

160 160
45 45

120 120
30 30

80 80
15 15

40 40
0 0
90 92 94 96 98 00 02 04 06 08 10

0 0 Source: U.S. Department of Commerce, U.S. Department of Labor

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 and Wells Fargo Securities, LLC

11
Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Houston MSA Nonfarm Employment

Houston 8%
3-Month Moving Averages
8%

 Houston’s economy continues to struggle to 6% 6%

build momentum. Nonfarm employment
increased just 0.5 percent in 2010, producing a 4% 4%

net gain of 13,100 new jobs. Disruptions in

2% 2%
deepwater oil drilling have weighed on the local
economy. While the drilling moratorium has 0% 0%
been lifted, no new activity has taken place.
 Houston’s unemployment rate has actually
-2% -2%

increased slightly over the past year. Houston -4% -4%

continues to attract job seekers from the 3-Month Annual Rate: Dec @ 0.0%
surrounding area. The civilian labor force -6% Year-over-Year Percent Change: Dec @ 0.4% -6%

increased 1.0 percent in 2010, slightly outpacing Household: Year-over-Year Percent Change: Dec @ 0.6%
-8% -8%
household employment growth of 0.9 percent. 92 94 96 98 00 02 04 06 08 10

 Residential construction continues to struggle

with the payback from the homebuyer tax
Houston MSA Unemployment Rate
credits and the glut of foreclosed properties. Seasonally Adjusted
Permits for new single-family homes fell 9% 9%

4.1 percent last year to just 18,910 units. That

still was enough to rank Houston the number 8% 8%
one market for single-family starts last year.
Sales of existing homes fell 5.7 percent but have 7% 7%
shown some tentative signs of bottoming more
recently. Demand for apartments is picking up
6% 6%
but not as strongly as in Austin or Dallas.
 Houston’s economy should strengthen over the 5% 5%
coming year, as new petrochemical and natural
gas projects staff up and continue to draw in
4% 4%
new investment. Other areas of the economy Unemployment Rate: Dec @ 8.5%
look less certain. With the federal budget under 12-Month Moving Average: Dec @ 8.5%
intense scrutiny, the Johnson Space Center 3% 3%
90 92 94 96 98 00 02 04 06 08 10
faces an uncertain future. The merger between
United Airlines and Continental may also slow
the region’s recovery somewhat. Houston MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
80 80
Single-Family: Dec @ 18,228
Houston MSA Population Growth Single-Family, 12-Month Mov. Avg.: Dec @ 22,151
In Thousands Multi-Family, 12-Month Mov. Avg.: Dec @ 5,065
200 200

60 60

150 150

40 40
100 100

50 50 20 20

0 0
0 0
90 92 94 96 98 00 02 04 06 08 10

-50 -50 Source: U.S. Department of Commerce, U.S. Department of Labor

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 and Wells Fargo Securities, LLC

12
Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

San Antonio MSA Nonfarm Employment

San Antonio 9%
3-Month Moving Averages
9%

 After weathering the recession relatively well,

San Antonio’s recovery has tended to lag a bit. 6% 6%
Nonfarm employment increased 0.8 percent in
2010 and the unemployment rate actually
increased slightly, rising 0.4 percentage points 3% 3%

to 7.3 percent. The rise in the unemployment

rate results from faster growth in the labor
0% 0%
force, which grew 1.8 percent in 2010, compared
to a 1.2 percent gain in household employment.
 While job growth was relatively modest, labor -3% -3%
3-Month Annual Rate: Dec @ 2.0%
market conditions do appear to be improving. Year-over-Year Percent Change: Dec @ 0.8%
Manufacturing payrolls were unchanged over Household: Yr/Yr Percent Change: Dec @ 1.1%
-6% -6%
the past year and hiring has picked up in 92 94 96 98 00 02 04 06 08 10
financial services and business and professional
services. Government payrolls have also risen.
San Antonio MSA Unemployment Rate
 San Antonio’s housing market appears to have Seasonally Adjusted
bottomed. Sales of existing single-family homes 8% 8%

fell 2.0 percent in 2010, while permits for new

single-family homes declined 7.9 percent. 7% 7%
Permits for multi-family projects more than
quadrupled to 1,731 units, which likely reflects a 6% 6%
slight increase in demand for apartments.
 San Antonio appears to be well positioned for 5% 5%
the economic recovery. The military is
expanding medical facilities at Fort Sam 4% 4%
Houston, which should spur significant job and
population growth. The influx of military
3% 3%
personnel should further spark demand for Unemployment Rate: Dec @ 7.5%
housing and services. The federal budget is 12-Month Moving Average: Dec @ 7.4%
under intense pressure, however, and this may 2% 2%
90 92 94 96 98 00 02 04 06 08 10
delay or slow the anticipated gains from the
military.
San Antonio MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
20 20
Single-Family: Dec @ 3,528
San Antonio MSA Population Growth Single-Family, 12-Month Mov. Avg.: Dec @ 5,172
In Thousands Multi-Family, 12-Month Mov. Avg.: Dec @ 899
60 60 16 16

50 50
12 12

40 40
8 8

30 30

4 4
20 20

0 0
10 10 90 92 94 96 98 00 02 04 06 08 10

0 0 Source: U.S. Department of Commerce, U.S. Department of Labor

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 and Wells Fargo Securities, LLC

13
Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (704) 715-0314 eugenio.j.aleman@wellsfargo.com
Sam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Michael A. Brown Economist (704) 715-0569 michael.a.brown@wellsfargo.com
Tyler B. Kruse Economic Analyst (704) 715-1030 tyler.kruse@wellsfargo.com
Joe Seydl Economic Analyst (704) 715-1488 joseph.seydl@wellsfargo.com
Sarah Watt Economic Analyst (704) 374-7142 sarah.watt@wellsfargo.com

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