Texas employment growth rebounded in early 2026 after an unusually sluggish 2025, with jobs increasing 1.7% during the first quarter. However, the Iran conflict and its ripple effects on fuel costs and business confidence are creating significant headwinds for the state’s economy, according to the Dallas Federal Reserve’s latest Southwest Economy report.
The labor market recovery has been concentrated in a handful of sectors. Professional and business services accounted for a sizeable share of gains, with staffing services employment — often considered a leading indicator of labor market turning points — accounting for one-third of all job growth in the state during the first quarter. The rebound follows several years of contraction in the staffing sector, which partially reflected a readjustment from pandemic-era highs as employers shifted toward permanent hires during the tight labor market.
The outsized share of temporary staffing gains could indicate that businesses prefer the flexibility of adding temporary workers over permanent staff amid heightened economic uncertainty, the Dallas Fed noted. Even so, the increased demand for temporary workers signals an uptick in overall labor demand.
Texas’ unemployment rate has remained low, in line with the national rate of 4.3%. Broader measures improved, with the U6 rate — which includes discouraged and part-time workers seeking full-time employment — declining from 8.5% to 7.9% during the first quarter. However, the labor force participation rate ticked down to 64.4% in March, a declining trend since September 2025 that could mask underlying weakness if driven by discouraged workers exiting the labor force.
Geopolitical pressures are compounding concerns. Nearly half of respondents to the Texas Business Outlook Surveys in April reported a net negative impact from the Iran conflict, with service sector firms bearing a heavier burden at 51% citing negative impacts versus 35% of manufacturers. Manufacturing activity has been a bright spot, surging on pent-up demand, onshoring production, and AI infrastructure investments, according to the Dallas Fed.
Headline business activity indicators remain positive, the Dallas Fed said, pointing to an economy that is resilient but vulnerable to sustained geopolitical pressures.
