“We believe that private sector job creation, limited fiscal challenges, stable housing market, rising international energy demand and surging exports will sustain Texas’ recovery,” Karp notes, adding that Texas can boast about creating the most private sector jobs in the country

From January through September 2010, Texas created 182,200 private sector jobs – roughly 16% of the US total. The state is one of only six states whose year-to-date private sector job creation exceeds 2%.

Although the pace of job creation slowed across industries in September’s preliminary employment report from the US Bureau of Labor Statistics, BBVA Compass says Texas’ solid labor market results from a private-sector led recovery that has eluded many other state economies.

In particular, the state’s service and manufacturing sectors are growing. From oil and gas extraction to health care-related industries, Texas’ service sectors have added more than 3% to each of their payrolls, according to BBVA Compass. And contrary to the perception of a languishing US manufacturing industry and the exportation of high-skill jobs, Texas’ manufacturing sector has increased employment nearly 3.5% in 2010.

And even as residents in other states continue to spend sparingly, retail sales in Texas are supporting the state’s overall economic growth. In fact, retail sales are posting positive growth over the year.

BBVA Compass contends that the nearly 3% differential relative to nationwide retail sales indicates that private consumption will continue to boost Texas’ GDP. “Rising sales brings additional tax revenue, and indeed, sales tax collections were up nearly 7% in September over the prior year,” Karp point outs.

Of equal importance, Texas’ projected budget deficit for 2011 is around 10% of expenses – the 16th lowest out of 46 projected deficits. Yet, stable home prices and property tax receipts, along with an ample rainy day fund, minimizes downside risks from state and local government budget cuts or tax increases.

Although the majority of states have little remaining in their rainy day funds, that’s not the case for Texas: at the end of fiscal year 2010, the National Association of State Budget Officers projects a total rainy day fund balance of only $29 billion, and 63% of that total is held by Alaska and Texas.

“Texas is among the least financially stressed states based on current levels of debt, property taxes and job situation,” says Jason Frederick, BBVA Compass’ senior economist, adding that California, New Jersey and New Mexico are among the most stressed.

Although BBVA Compass’ report says Texas’ positive job creation and expanding population favor residential investment, the economists do not expect a strong resurgence in the housing market. Likewise, the commercial real estate market will remain subdued into 2011, despite increasingly favorable lease terms and property sales.