Texas Economy Shows Mixed Signals as Service Sector Grows While Retail Sales Decline

Federal Reserve Data Reveals Contrasting Economic Trends

Texas's service sector expanded at a faster pace in August while retail sales continued their downward trajectory, creating a tale of two economies within the Lone Star State, according to the Federal Reserve Bank of Dallas's monthly outlook surveys. The service sector revenue index rose to 8.6 from 6.3 in July, while retail sales declined to -2.1, indicating continued weakness in consumer spending across Texas.

Data collected from August 12 to 20 and released by the Dallas Fed shows that 252 of 355 Texas service sector business executives responded to the survey, providing critical insights into the state's economic health amid national uncertainty about interest rates, tariffs, and inflation.

Service Sector Momentum Builds Despite Employment Stagnation

The Texas service sector demonstrated resilience in August, with key indicators pointing toward continued expansion. The revenue index's increase to 8.6 represents the sector's ability to generate growth despite broader economic headwinds, according to the Dallas Fed. Business confidence also improved markedly, with the company outlook index rising six points to 4.3, marking its first positive reading in six months.

However, employment growth remained stagnant. The employment index declined to 1.2 from 2.8 in July, indicating minimal job creation across the service sector. Hours worked increased modestly with an index of 5.1, suggesting businesses are asking existing employees to work more rather than hiring new staff.

Retail Sector Struggles Continue as Consumer Spending Weakens

Texas retailers faced a seventh consecutive month of declining inventories, with the inventory index remaining negative at -2.7 in August, according to the Dallas Fed. Retail employment contracted further, with the employment index falling to -2.0 and part-time employment plummeting 18 points to -15.5.

The retail sector's challenges reflect broader consumer caution, as one survey respondent noted that "consumers are not agreeing to price increases" and "everyone seems to be very cautious," according to comments included in the Dallas Fed report.

Business Leaders Voice Tariff and Interest Rate Concerns

Survey respondents painted a complex picture of economic uncertainty, with tariffs and interest rates emerging as primary concerns. "Political uncertainty in the form of tariffs and high interest rates is the biggest challenge in the market," one business executive told the Dallas Fed.

Another respondent highlighted the operational impact: "Uncertainty about tariff policy continues to make it extremely difficult to make big capital-expenditure decisions. Should we pull the trigger and buy our 2026 fleet now, even though they are charging us a 10 percent tariff surcharge?"

Wage and Price Pressures Intensify Across Sectors

Both sectors continued to experience pressure on wages and input costs. The service sector's wages and benefits index rose to 15.7, while input prices climbed to 27.9. One engineering firm reported unprecedented cost increases, stating: "We have never seen this kind of increase in 30 years. Business insurance in general for engineering firms will go up by 15-25 percent. Health insurance premiums for us are going up by 30 percent"”

Future Outlook Remains Cautiously Optimistic

Despite current challenges, business leaders expressed measured optimism for the next six months. The future revenue index for services increased to 33.8, while future retail sales remained steady at 29.6. However, uncertainty persists, with one respondent noting: "All the data points to future stagflation"”

The Dallas Fed's survey methodology calculates indices by subtracting the percentage of respondents reporting decreases from those reporting increases, providing a balanced view of economic sentiment across Texas's diverse business landscape.

Economic Crossroads for Texas

The divergent paths of Texas's service and retail sectors reflect broader national economic tensions between business investment and consumer spending. While service sector companies show resilience through revenue growth and improved business confidence, retail struggles highlight consumer caution amid persistent inflation and policy uncertainty.

The Federal Reserve Bank of Dallas will release its survey results on September 30, 2025, providing additional insights into whether these trends continue or begin to converge as businesses navigate an increasingly complex economic environment.