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As summer approaches, the economic outlook is decidedly mixed, with most indicators pointing toward a further decline from the highs reached around the beginning of the year. On the positive side, the economy continues to add jobs (431,000 in March); the unemployment rate is still near historic lows at 3.6%; earnings over the past year have shown strong increases; and labor market participation has increased.
However, the strong performance of the U.S. economy, combined with the record levels of pandemic stimulus money pumped into the economy, have driven inflation to some of the highest levels in five decades. The consumer-price index showed inflation of 8.5% in March and 8.3% in April. To reduce this inflation, the Federal Reserve raised interest rates twice this year, first by 0.25% in March and again in April by 0.5%. Raising interest rates can combat inflation by reducing demand for credit—from home and auto loans to commercial borrowing—thereby reducing the amount of money circulating in the economy. It is likely that the Federal Reserve will continue to raise interest rates, however, as upward pressures continue to push the consumer-price index. A backlog of demand for homes and automobiles continue to drive prices, with houses in particular further affected by a labor shortage. Shutdowns in China have slowed production and disrupted supply of a variety of manufactured goods, raising prices. The war in Ukraine is driving up food and commodity prices and leading to oil shortages. Labor shortages across the economy are slowing production and shipping as well as leading to higher consumer prices.
Markets have reacted to both inflation and Federal Reserve actions by falling into decline, wiping out over a year of gains. Analysts are divided over whether this is a brief market correction before the upward trend resumes or part of a broader market correction that could see bubble-type and speculative stocks collapse, which can often result in general contagion across the financial sector that leads eventually to a recession of the general economy.
Despite these economic headwinds, the Texas economy continues to benefit from robust growth in population, employment, corporate investment, and increased oil and gas activity. State tax revenue is also very high. At a recent meeting of the Senate Finance Committee, the comptroller estimated a surplus around $13 billion for the 2023 Legislative Session. In the near term at least, it is expected that the strength of the job market largely offsets the declining fortunes of financial markets; that wage growth reduces the impact of inflation; and that strong state revenues soften the impact of any potential economic slowdown for state agencies and public universities.
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