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Permian rig count growth a boon to Texas’s overall economy

Dallas-based Comerica Bank (ticker: CMA), released its Texas Economic Activity Index last week, saying its measure of the Texas economy advanced for a second consecutive month, gaining 0.4 percentage points in October to a level of 91.0. September’s index reading was 90.6.

October’s index reading is 25%, above the index cyclical low of 72.8, the bank said. The index averaged 97.5 points for all of 2015, seven and one-half points below the average for full-year 2014.

Comerica Index Shows Texas Finally Heading Up-ish

Source: Comerica

Smacked down by an oil price slump that blindsided the industry beginning in fall 2014, Texas has struggled to keep up with more consistent growth being recorded by the other states that the bank tracks – Arizona, California, Michigan and Florida, all of which have been on a 45-degree post recession climb since mid-2009 and early 2010, attaining current scores between 110 and 155, compared to Texas’s 91.

Comerica Index Shows Texas Finally Heading Up-ish

Source: Comerica

Comerica Index Shows Texas Finally Heading Up-ish

Source: Comerica

Comerica Index Shows Texas Finally Heading Up-ish

Source: Comerica

Comerica Index Shows Texas Finally Heading Up-ish

Source: Comerica

The Texas bank said six out of eight index components measured in Texas were positive in October:

  • Nonfarm employment
  • State exports
  • Unemployment insurance claims (inverted)
  • Rig count
  • Home prices
  • Hotel occupancy

Housing starts eased in October for the third consecutive month and state sales tax revenue eased as well, the bank said.

“Job growth appears to be stabilizing for Texas, with gains seen for the last eight consecutive months,” the report said.

Positive factor for Texas: increasing rig count led by Permian

The Permian basin, with 267 active rigs, remains the most active basin in the U.S. in terms of drilling by a factor of 5.7x compared to the Eagle Ford, the next most-active basin, Baker Hughes (ticker: BHI) reported last week.

“As of the end of October, the Texas rig count had increased to 256 active rigs, well above the May 2016 low of 173,” said Robert Dye, Chief Economist at Comerica Bank. “The recent oil production cuts announced by Kuwait and Oman suggest that the early days of the OPEC production agreement have been successful and will support higher crude oil prices.

“We expect Texas drilling activity to continue to gradually improve through early 2017, contributing to a strengthening state economy,” Dye said.

The Texas Economic Activity Index consists of eight variables, as follows: nonfarm payrolls, exports, hotel occupancy rates, continuing claims for unemployment insurance, housing starts, sales tax revenues, home prices, and the Baker Hughes rotary rig count. All data are seasonally adjusted, as necessary, and indexed to a base year of 2008. Nominal values have been converted to constant dollar values. Index levels are expressed in terms of three-month moving averages.

National economy

In its weekly economy analysis, Comerica looked at job growth, inflation and the Fed:

“The Fed will watch wage growth carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later. The minutes of the Federal Open Market Committee meeting of December 13/14 show FOMC member’s contemplating and struggling to integrate changing expectations for 2017.

comerica-jobs-graph

“Quantifying and sequencing the potential policy levers that the incoming Trump Administration may pull is still challenging, but it is safe to say that most potential economics-related policies would marginally boost inflation. Trump policies will be rolled out on the heels of a production agreement by OPEC members that has already boosted oil prices into the mid-to-low $50 range. Other commodity prices, particularly metals, have also been on the upswing, adding to inflation expectations.

“The ISM Manufacturing Index for December increased to a solid 54.7. The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing.

“Auto sales in December surged to an 18.4 million unit rate, bringing the 2016 total up to a record 17.54 million units. We expect sales to ease in 2017. Strong December retail sales are supportive of Q4 GDP.”

Comerica Bank is the largest U.S. commercial bank headquartered in Texas.


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