The state’s economy has remained surprisingly strong despite an energy slump that has forced tens of thousands of Texans out of work in recent months. But the tough times in the oil and gas industry are far from over, the new head of the Federal Reserve Bank of Dallas said Wednesday.
Delivering his first remarks since he was appointed president and CEO, Rob Kaplan said that while the downturn has slowed the rapid clip of Texas’ economic expansion in recent years, the state will still see job growth of 1.2 percent this year, despite rampant layoffs across the energy sector.
The state’s unemployment rate at 4.3 percent remains well below the 5 percent national average, even as oil and gas companies curtail spending plans and shrink their payrolls, because labor shortages persist in several industries, including construction, nursing, truck driving, retail and restaurants, Kaplan told an audience gathered at the University of Houston on Wednesday.
He credited the solid growth in the service sector for preventing Texas from slipping into an economic recession, noting particular strength in health care and leisure and hospitality. The energy sector remains a key driver of the state’s economy, but Texas is a more diverse place than it was in years past, Kaplan said.
“The Texas economy is proving to be highly resilient, and I’m very optimistic about the future of this state,” he said.
The state has also benefited from a flurry of construction activity along the Gulf Coast, where a surge of cheap natural gas has fueled a massive expansion of the petrochemical industry. In addition, Texas has attracted an array of new companies that have relocated operations to the state, including some outside of the energy sector, which has added new people to the state’s population faster than the national average. That trend will likely continue, even as the energy sector continues to reel from anemic oil prices that will likely remain lower for longer, he said.
Domestic benchmark crude has been pulled down by a glut of oil that has kept prices stuck below $50 per months, a level too low for some shale producers to turn a profit. Oil companies have beat a retreat from the oil patch, laying down rigs and dropping plans for further exploration activity, but production has remained stubbornly high, as crude producers figure out how to wrest more oil and gas from the ground cheaper and faster than before.
Kaplan said he doesn’t expect daily oil production and consumption to reach a reasonable degree of balance until late 2016, or early 2017, a lengthy timetable that spells more immediate financial trouble for exploration and production firms and the oil field services companies that need a higher oil price to bolster their balance sheets.
“Anytime you see a market where prices are volatile up and down, it means participants are struggling to to get a grip on supply and demand,” he said. “They’re trying to get a grip in particular on the speed of this balancing process. So while this is going on we expect to see more price volatility and in addition, we expect to see more bankruptcies, mergers and restructurings in the energy industry.”
Houston, especially, is feeling the “negative repercussions” of the fallout from the crude slump, posting a 4.4 percent unemployment rate, which is higher than the rates in Dallas, San Antonio and Austin.
Kaplan declined to weigh in on the speculation that the Fed could raise interest rates in December, but said U.S. monetary policy will likely remain “accommodative” for some time, although he emphasized that that doesn’t mean keeping interest rates at zero.
Any rise in interest rates will be gradual, which means the Fed will reassess the impact of any rate hike before deciding to boost rates higher, if needed, Kaplan told reporters in a meeting following his speech.