Full text of District Highlights : September 1986

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DALLAS
Federal Reserve Bank of Dallas

September 1986

Declines in Nonresidential Construction Contracts
Portend Texas Employment Losses
Recent declines in nonresidential
construction contracts in Texas bode
ill for construction employment in the
state. The slowdown in new nonresi­
dential construction has already
resulted in heavy employment losses.
Moreover, because of the lead relation­
ship between contracts and construc­
tion employment, the negative employ­
ment effects of the slump in contracts
will worsen over the near future. As a
result, Texas construction employment
is likely to decline further this year.
Contracts Lead Employment

earlier every month since October last
year. For the first six months of 1986,
the level was 34 percent lower than for
the same period in 1985. The declines
occurred in response to high vacancy
rates and have left nonresidential
square footage contracted at its
lowest levels since 1977.
Based on the estimated lead rela­
tionship between contracts and con­
struction employment, the declines in
contracts led to a loss of 24,000 con­
struction workers from October 1985 to
June 1986. This negative effect is

Because a substantial share of
nonresidential construction is on a
large scale, an increase in nonresiden­
tial construction contracts in any given
month generally implies heightened
construction activity for a prolonged
period of time. An increase of 1 million
square feet in nonresidential construc­
tion contracted in Texas lasting one
month has an estimated positive effect
on construction employment of 715
workers during the same month,
reaches its peak effect of 1,174
workers seven months later, and con­
tinues to stimulate employment for
another seven months (Chart 1). The
same pattern of employment effects
holds for a decline in contracts but in
a negative, rather than positive,
direction.

The notion that defense spending
is a more important stimulus to
economic activity in the Eleventh
District than in the rest of the United
States is losing its validity. Per capita
defense expenditures in the District
states of Texas, Louisiana, and New
Mexico no longer exceed those in other
parts of the country by as much as in
the 1970s. Although military purchases
will continue to have important effects
on District states’ economies, reliance
on such purchases is likely to be no
greater than in the rest of the country.
This trend means that potential
declines in military expenditures will
not have a disproportionate effect on
the District economy.

Contract Declines Hurt Employment

Stimulus from Defense Spending

New nonresidential construction in
Texas has dropped sharply. Nonresi­
dential square footage contracted in
Texas has been below its level a year

Purchases for defense are a
substantial portion of total Federal
Government purchases, but some
areas of the country, including the

reflected in the steep decline in actual
construction employment over the first
half of this year (Chart 2). Because con­
tracts lead construction employment,
the employment reductions through
June represent only part of the full
effect of the slump in nonresidential
contracts. If the square footage of non­
residential construction contracted re­
mains near recent low levels, the
slump in contracts will result in an
estimated loss of 57,000 construction
workers from October 1985 to the first
(Continued on back page)

Impact of Defense Outlays Changing in District
Eleventh District, receive a larger share
than others. For example, 1985 outlays
by the U.S. Defense Department con­
stituted 37 percent of total Federal
Government expenditures in Texas,
compared with slightly under 30 per­
cent for the nation as a whole. These
include payments for goods and ser­
vices under procurement contracts, as
well as payments to individuals for
wages, salaries, and benefits.
The economic effect of defense ex­
penditures, like other government pur­
chases, goes beyond the initial goods
and services purchased. Those receiv­
ing the payments spend the money on
yet other goods and services. Such socalled multiplier effects, while not
limited to the states in which the
money is initially spent, have the
greatest effect in those states.
The magnitude of defense spending
in the Eleventh District states masks
(Continued on back page)

Chart 1
RELATIONSHIP OF TEXAS NON RESIDENTIAL
CONSTRUCTION CONTRACTS
AND CONSTRUCTION EMPLOYMENT

Chart 2
TEXAS CONSTRUCTION EMPLOYMENT

— 1,200 WORKERS

- 1 ,0 5 0

-

900

'ESTIM ATED EFFECT ON TEXAS CONSTRUCTION'
EMPLOYMENT OF A TEMPORARY INCREASE
OF 1 MILLION SQUARE FEET IN
NONRESIDENTIAL CONSTRUCTION CONTRACTED
UP TO 14 MONTHS EARLIER
■— 600 I------ 1------- 1------- 1------- 1-------- 1------1------0
2
4
6
8
10
12
14
MONTHS AFTER CONTRACT
-

750

Federal Reserve Bank of Dallas.

NOTE: Contract data came from McGraw-Hill Information Systems Company,
F. W. Dodge Division.
SOURCE: Federal Reserve Bank of Dallas.

Chart 3
REAL PER CAPITA DEFENSE SPENDING

Chart 4
REGIONAL COMPARISON OF
REAL DEFENSE SPENDING
|—

1. Except the Eleventh District states of Texas, Louisiana, and New Mexico.
SOURCES: U.S. Department of Defense.
Federal Reserve Bank of Dallas.

150 (INDEX, 1968 = 1 0 0 )-------------------

1. Northeast Census Region comprises the Middle Atlantic and New England
Census Divisions.
SOURCES: U.S. Department of Defense.
Federal Reserve Bank of Dallas.

LOANS-LARGE WEEKLY REPORTERS

DEPOSITS-LARGE WEEKLY REPORTERS

Eleventh Federal Reserve District

Eleventh Federal Reserve District

r-

75 PERCENT'

(NOT SEASONALLY ADJUSTED)

r-

30 PERCENT*1

-

20

10
1. Percent change from same quarter in previous year.
SOURCE: Federal Reserve Bank of Dallas.

(NOT SEASONALLY ADJUSTED)

TIME AND SAVINGS X s .

1983

I

1984

I

1. Percent change from same quarter in previous year.
SOURCE: Federal Reserve Bank of Dallas.

1985

I

1986

DISTRICT BRIEFS
T h e E le v e n th D is tric t e c o n o m y a p p e a rs to b e s ta b iliz in g a s th e d e c lin e s in e n e rg y a n d c o n s tru c tio n a re a rr e s te d .

• After declining several months, nonagricultural
employment in Texas grew in July. The serviceproducing sector has been increasing steadily,
more than offsetting losses in oil and gas ex­
traction, manufacturing, and construction. The
large proportion of energy employment in Loui­
siana is contributing to the persistent declines
in employment there. In New Mexico, the least
energy-intensive state in the District, employ­
ment has been more resilient.
• The agreement by the Organization of
Petroleum Exporting Countries to restrain pro­
duction has lifted oil prices. OPEC hopes that
production restraint will result in an oil price of
about $17 to $20 per barrel. The likelihood of
success is uncertain as the agreement could be
undermined by cheating on production quotas,
a persistent problem for OPEC.
• Drilling appears to be stabilizing. The rig count
bottomed in June, before the OPEC agreement,
and has since grown gradually. Employment in
oil and gas extraction, however, continues to

HOUSING PERMITS IN TEXAS

UNEMPLOYMENT RATE
i—

12 PERCENT

1983

(QUARTERLY AVERAGES. SEASONALLY ADJUSTED)

I

1984

decline. Even if OPEC should be successful,
the estimated level of prices is not likely to lead
to much of a resurgence in drilling in the
District states.
• Construction employment is declining in the
wake of a sharp decrease in office building con­
struction. The value of total construction con­
tracts was steady from May through July but
substantially below the year-earlier levels.
• Manufacturing in the District is faring worse
than in the nation as a whole because of the
weakness in energy and construction. Depre­
ciation of the dollar promises some aid to the
beleaguered manufacturing sector, but there is
no evidence of improvement yet.
• The weak District economy is reflected in the
balance sheets of the large banks. Loan volume
has continued to decline. Real estate lending is
still growing, but the rate of expansion has
slowed dramatically. As a result of the reduced
economic activity in the District, total deposits
have contracted further.

I

1985

I

1986

24 THOUSAND

1983

I

1984

I

1985

1. Louisiana, New Mexico, and Texas.
SOURCES: Texas Employment Commission.
U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

SOURCES: U.S. Bureau of the Census.
Federal Reserve Bank of Dallas.

CONSUMER PRICE INDEX

TEXAS INDUSTRIAL PRODUCTION INDEX

r—

6 PERCENT'

\
1983

I

1984

I

1. Percent change from same quarter in previous year.
SOURCES: U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

1985

I

1986

I

1986

Contracts (cont.)

Defense Outlays (cont.)

quarter of 1987. This loss is equivalent
to a 12.6-percent decline in construc­
tion employment.

the changing relative importance of
this stimulus. Although Texas, the ma­
jor recipient of defense dollars in the
District, ranked third in total defense
spending among all states in 1985, its
ranking falls to fourteenth when
population is taken into account. As
shown in Chart 3, per capita defense
outlays for the District states no longer
exceed those for the rest of the nation
by as great a margin as in the past.
Much of this narrowing of per capita
defense spending is the result of faster
population growth and economic diver­
sification in the region during the
economic expansion before 1982. As
indicated in Chart 4, however, defense
spending growth in the District states
compared with some other regions
has been unexceptional. Growth in
inflation-adjusted defense spending in
these states has been about equal to
that for the Northeastern United States

Employment Reductions Likely
Texas construction employment will
probably decline further this year as
the lagged negative effects of the
slump in nonresidential contracts are
realized. A rebound in nonresidential
contracts or an increase in either
residential or non-building construc­
tion contracts would stimulate employ­
ment and possibly offset the negative
effects of the recent low levels of
nonresidential contracts. However,
given past overbuilding and the current
weakness in the regional economy, any
stimulus from increases in contracts
will likely not be sufficient to prevent
some further declines in Texas con­
struction employment.
—Jeffery W. Gunther

and has not been as rapid as in the
states along the Pacific Coast.

Effect of Defense Spending Changes
The prospects of cutbacks in govern­
ment spending, including defense out­
lays, as a result of proposed deficit
reduction measures have raised con­
cerns about the effects on the Eleventh
District. Should such cutbacks take
place before the District begins to
recover from the current economic
malaise, such recovery would be
delayed. Over the longer run, however,
the District economy will likely become
less dependent on defense spending,
just as it is becoming less dependent
on the energy industry. As this adjust­
ment occurs, the ripple effects of
future defense spending changes will
be no more serious in the District than
in the rest of the country.
— William T. Long III

The views expressed are those of the authors and do not necessarily reflect the positions of the
_______________ Federal Reserve Bank of Dallas or the Federal Reserve System._______________

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