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Moderation of growth for the short run

Thu, May 31 2007, 09:22 GMT
by Rae Anne Dodds

BBVA Bancomer

• Data points to sharper moderation for 2007 GDP growth
• Weak exports & industrial production cause drag
• Texas will see GDP rebound in 2008

The falling leading indicator signals GDP moderation. The indicator has been declining since October 2006 and moved into a negative year over year (YoY) growth rate in February. The last time a negative YoY growth rate occurred (11/2000), personal income and labor growth slowed from 8.50% (2000) to 2.71% (2001) and 2.15% (2000) to 0.16% (2001), respectively. We do not predict as severe of a decline since a stronger US economy and stronger Texas fundamentals in the housing and energy sector exist today compared to 2000. Nonetheless, we do expect a slowing from the 2006 growth.

Two other indications of pending moderation stem from industrial production and trade. Texas industrial production YoY growth rate is declining towards the US 2007 average (3.4%), while exports to Texas’s main trading partners, Mexico and Canada, have flattened. Trade with Mexico decreased in 1Q07 YoY by 3.6%. This trend will likely continue because of the forecasted slowing of US 2007 GDP. (Mexico’s GDP moves in tandem with US GDP.) However, our 2008 forecast expects US GDP growth to rebound and US industrial production has accelerated the past three months. The US production index typically leads the TX by approximately six months, so the moderating influences of production and exports will likely be transitory.

Nonfarm payroll YoY growth has slowed from the 2006 average (3.0%), another signal of GDP moderation from 2006. However, payroll growth is still above the US trend. Moreover, recent unemployment numbers put positive pressure on future personal income and consumption. The unemployment rate fell from 4.3% (March) to 4.2% (April) indicating continuing labor tightness. Thus slowing payroll growth indicates moderation from the 2006 GDP rate, but the payroll growth and the low unemployment rate will aide future GDP rebounding.

Two positive aspects within the Texas economy, again suggesting brief growth moderation, are the healthy housing and energy sector. New residential construction is slowing within a yearly perspective, but the monthly perspective reveals some recovery. We expect to see existing home sales increase by 4.1% in 2007, below the 2006 rate (11%). This is a deceleration from recent numbers but above the US trend, consequently Texas home demand should remain relatively strong. The energy sector has also maintained relative strength with an upturn in the petrochemical sector and continued YoY expansion of the oil and gas production index equal to 8.8%.

Our expected Texas GDP moderation will be milder than the national average but short-lived, similar to the brief US moderation.

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