Special Commentary

Texas Economic Outlook: February 2010

Tue, Feb 9 2010, 19:49 GMT
by Wells Fargo Research Team - Wells Fargo Investments, LLC | View company's profile

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Texas Recovery is at Hand, but Clouds Remain

The drag from the U.S. and global recessions on the Texas economy appears to have abated. Most of the state’s key economic indicators have posted some improvement during recent months, even though most still remain well into negative territory on a year-to-year basis. We believe the recession ended around the middle of 2009 nationwide, and the Lone Star State appears to have turned the corner at about the same time. There are still plenty of storm clouds on the horizon, however. While the national economy saw exceptionally strong real GDP growth during the fourth quarter, much of that growth was due to a swing in business inventories, which is hard to isolate at the state level. That said, Texas is clearly seeing some short-term benefit from the massive fiscal and monetary stimulus put in place this past year. The real test, for both the nation and Texas, will be what happens once this stimulus winds down around the middle of the year? Texas is in better shape than any other large state and will likely post solid gains during the early stages of the recovery.

Texas Recession’s LIFO: Last In; First Out?

Texas entered the recession about nine months after the nation did according to the Texas Business Cycle Index (TBCI). Texas nonfarm employment declined shortly after oil prices collapsed during the second half of 2008. The price of West Texas Intermediate (WTI) petroleum topped out at around $142.00 per barrel around the Fourth of July 2008 and then tumbled to just over $32.00 per barrel around Christmas of that year. Prices for natural gas declined by an even greater magnitude and for a longer period of time. After hitting a high of $13.28 per million Btu (MMBtu) just before the Fourth of July 2008, prices began to tumble and eventually dropped below $2 per MMBtu just before Labor Day of 2009. Since then, prices bounced back a bit and averaged $5.13 per MMBtu in January.

Collapsing energy prices quickly translated into reduced exploration and production activity and it did not take long for employment to turn down. Texas nonfarm employment peaked in October 2008 and declined in 10 of the next 11 months, resulting in a cumulative net loss of around 350,000 jobs. The huge job losses that followed the plunge in energy prices underscore the severity of the economic downturn in Texas and expose the state’s still-heavy reliance on the energy sector. Oil and gas production have a huge multiplier effect, with the energy sector directly employing nearly a quarter million workers in Texas. The energy industry also fuels activity in key supplier industries, such as fabricated metals, and employs thousands of engineers and professional staff throughout the state.

There was more than an energy bust that brought down the Texas economy. Texas was also severely affected by the global financial collapse that followed the bankruptcy of Lehman Brothers in September 2008. Once credit markets seized up, home sales and residential construction plummeted. International trade, which had been a key source of growth leading up to the crisis, was abruptly thrown into reverse as trade credit became extremely hard to get. Moreover, the collapse in global economic growth weighed heavily on the state’s important manufacturing industry, particularly petrochemicals and consumer products.

Now that U.S. economic growth is picking up, will Texas emerge from this recession ahead of other states? We believe it will. Texas has avoided many of the most problematic aspects of the housing bust. Home prices rose less rapidly during the boom years and face less of a correction. The recession still produced a run-up in delinquency rates and foreclosures around the state, but far fewer Texans are underwater with their mortgages compared to other large, rapidly growing states. The latest data from First American Core Logic show that just 11.0 percent of Texas homeowners with a mortgage owe more than their home is currently worth versus 22.6 percent nationwide. Although Texas has a relatively large proportion of subprime loans, most are fixed-rate and delinquency rates are currently relatively low. In addition, only a small proportion of subprime and Alt-A mortgages will reset in Texas this year.

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Published On Tue, Feb 9 2010, 19:53 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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