May 2008

Payroll employment growth in Houston slowed to a 1.4 percent annual rate over the last quarter—a third of the growth rate seen in 2007. This broad-based slowdown seems plausible in light of national economic problems, but other data look less ominous. The local unemployment rate is holding steady near 4 percent, the Houston Purchasing Managers Index has bounced back over 60 and domestic drilling activity is moving up after a pause of more than 18 months. Payroll employment is subject to further revision and may be understating the true pace of the local expansion.

Retail and Auto Sales
Easter sales in early April gave retailers a nice boost but were followed by a weak second half of the month and a mediocre May. Big-box stores and discounters did better than full-line department stores, furniture stores lagged, and improvements in grocery and gasoline revenues were largely the product of inflation.

Houston car and truck sales were off 4.2 percent in April, with auto sales flat compared with a year ago and truck and SUV sales off 10.6 percent. Even truck-loving Houstonians apparently blink when a gallon of gasoline approaches $4.

Real Estate
Existing-home sales continued to look weak through April when compared with year-earlier figures, just as they have each month since subprime lending evaporated last August. Sales of used homes were off 14 percent in April, but the median home price was holding steady and the inventory of homes to be sold was a still-healthy six months. New-home sales were also weak, and builders have pulled back sharply on speculative construction.

Energy Prices and Refining
The price of light sweet crude moved over $100 per barrel in late February and rocketed to new highs over $130 per barrel in late April. Rising crude prices pulled gasoline, diesel and heating oil prices to all-time highs. Diesel and heating oil were helped by cold weather and strong export demand. Domestic gasoline demand softened in response to soaring prices at the pump.

Natural gas prices rose steadily from over $10 to near $12 per thousand cubic feet, following crude upward. Prices were also helped by a major pipeline outage in the Gulf of Mexico and the return of once abnormally high natural gas inventories to near-normal levels.

Refiners ramped up production from 82 to 88 percent capacity utilization, as spring maintenance turnarounds ended and profit margins improved. Refiners tweaked their production to shift the output mix toward heating oil and diesel, where margins were better than for gasoline.

Petrochemicals
Rising energy prices put upward pressure on a wide range of commodity chemicals and plastics. The ability of producers to pass these increased costs through the production chain depended on the combined strength of domestic and export demand for the product. Domestic demand was generally weak, but producers able to use natural gas feedstock held a significant cost advantage over producers dependent on oil-based feedstock. This cost advantage led to significant export demand for products such as ethylene and polyethylene. Other products—like caustic soda needed to make alumina—saw strong demand because they were caught up in the global commodity boom. Export demand for petrochemicals and plastics created a shortage of bagging, warehouse and container capacity at ports including Houston.

Drilling and Oil Services
Optimism about natural gas and cash flow from rising energy prices pushed the number of rigs working in the U.S. steadily toward 1,900, the highest level since the winter of 1985–86. Much of the additional drilling is directed toward unconventional natural gas, especially shale, which continues to generate excitement as new producing areas open. Nearly two years of flat drilling activity in the U.S. allowed the number of rigs and other durables like drill pipe to catch up with demand. So far, the additional drilling is not putting pressure on equipment or the price of most services.