Business Cycle Indexes & Texas Leading Index

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Posted on 08/10/2021 by Beverly Kerr

  • Austin’s overall economic activity expanded for the 14th successive month, following the unprecedented decline of March and April 2020 due to COVID-19.
  • The index surpassed February 2020’s level in May and in June it stands at 1.0% above Austin’s pre-pandemic peak.
  • Austin is the best recovered among the major Texas metros.
  • The Texas Leading Index increased by 0.93% in June and growth has been positive for 13 of the last 14 months, suggesting continued expansion in the second half of the year.

The latest update to the Federal Reserve Bank of Dallas’ Business Cycle Indexes reveals Austin’s overall economic activity expanded for the 14th successive month, following the unprecedented decline of March and April 2020 due to COVID-19. The metro’s index reached a peak of 980.4 (Oct. 1980=100) in February 2020 and was 13.6% below that by April 2020. The index surpassed February 2020’s level in May and it stands at 990.4 in June—1.0% above Austin’s pre-pandemic peak. Austin is the best recovered among the major Texas metros.

The Metro Business Cycle Index is a broad measure of economic activity. It summarizes movements in locally measured payroll employment, the unemployment rate, inflation-adjusted wages, and inflation-adjusted retail sales. The indexes are weighted so that movements in the index represent underlying co-movements in the indicators and thus the underlying state of the economy and illustrate each metro’s patterns of recessions and expansions. The Texas Business Cycle Index is constructed using payroll employment, gross state product, and the unemployment rate.

Positive month-over-month growth of 0.54% in May accelerated to 0.79% in June in Austin “led by declines in unemployment and recent broad-based job gains,” according the Dallas Fed. On an annualized basis, index growth was 9.9% in June, following 6.7% in May.

Austin’s index rose every month from July of 2009 through February 2020 and the average annual rate of growth since 2010 had been over 7% until the impact of pandemic.

The two graphs below show views of the indexes for Texas’ largest metros over longer- and shorter-range spans. The first indicates the path over the last four decades and the second shows the indexes rebased from 1980 to 2007 to isolate the relative growth paths of the metros since just before the Great Recession.

Following the Great Recession, the five major metros began expanding again in the second half of 2009. Between the end of 2009 and the February 2020, Austin’s index grew by 99%, while Dallas, Fort Worth, San Antonio, and Houston’s grew by 81%, 52%, 50% and 47%, respectively.

Dallas’ and Fort Worth’s pandemic-related contractions were more moderate (11.9% and 12.3%, respectively) than Austin’s 13.6% decline. Houston and San Antonio had sharper declines in March and April (18.6% and 15.1% respectively). While Austin’s index in June sits at 1.0% above February 2020, the other major Texas metros have not yet overtaken their pre-pandemic peaks. Dallas is 0.2% below in June, followed by San Antonio (-1.7%), Fort Worth (-3.0%), and Houston (-8.8%).

Based on the Business Cycle Index, the current level of economic activity in Austin surpasses the metro’s pre-pandemic peak, and Dallas is close to achieving the same. Houston’s index is presently comparable to where it was at the beginning of 2018, and Fort Worth and San Antonio are at levels comparable to April 2019.

In addition to the Business Cycle Index, which is a coincident index, the Dallas Fed also produces a Texas Leading Index to forecast future economic activity for the state.

The Texas Leading Index increased strongly for the third consecutive month. With the exception of a slight decline in March 2021, the index has increased every month since May 2020. The Dallas Fed says this suggests continued expansion in the second half of the year.

There are eight different components of the Leading Index. Five of the eight indicators gave positive contributions to the leading index in June.

According to the Dallas Fed, “Gains in the index were fairly broad based across components and led by another sharp decline in initial claims for unemployment insurance. The other labor market indicators in the index were mixed, with help-wanted advertising increasing at a healthy pace but average weekly hours in manufacturing declining. The U.S. leading index and the two energy indicators, the inflation-adjusted oil price and permits to drill new wells, gave positive signals. The stock price of Texas-based companies and the Texas trade-weighted value of the dollar made slightly negative contributions.”

The Dallas Fed’s Texas Employment Forecasting Model utilizes past changes in state employment and the Texas Leading Index to project job growth. Changes in the Leading Index have an impact on employment with a lead time of three months. However, due to the rapid onset of the COVID-19 pandemic, current job growth projections are being produced by a model based on expectations for U.S. GDP, Texas COVID-19 hospitalizations, and oil futures prices.

The Texas Employment Forecast currently projects 5.6% job growth in 2021 and jobs in December 2021 will total just over 13 million, bringing a return to pre-pandemic employment levels by year-end.

That number will be somewhat below the number of jobs Texas would have attained a year earlier, had the pandemic not occurred. In the Dallas Fed’s January 2020 forecast, December 2020 jobs were expected to total nearly 13.2 million.

Additional forward-looking data comes from the Texas Business Outlook Surveys of executives in manufacturing, the service sector, and retail. The bottom line of the Dallas Fed’s August 5 summary of the latest of these is an expectation for strong output expansion and a broadly optimistic economic outlook: “Notwithstanding the elevated COVID-19 risks and continued challenges in the supply chain and labor market, Texas business respondents remained positive in July. Company outlooks remained far above average, reflecting broad optimism and high growth expectations for the fall.”

All data displayed and discussed above is seasonally adjusted.

The Metro Business Cycle Index, as well as the Texas Business Cycle and Leading Indexes are included in the Chamber’s monthly Economic Indicators report and associated Excel files. The Metro Business Cycle Index is also featured on the Chamber’s Economic Recovery Dashboard.

Related Categories: Central Texas Economy in Perspective