June 2008

After Houston added close to 100,000 jobs in 2006 and 2007, its job growth is now running at a pace of only 40,000 per year. These latest job numbers are still subject to revision, but today’s economic backdrop of slower national and global expansion provides an easy rationale for a local deceleration. Rising oil and natural gas prices have kept Houston from sharing many national economic problems, but a growing question is whether oil, natural gas and other commodities can continue to surge in the face of a slower global expansion.

Retail and Auto Sales
Retailers with multiple locations say Houston retail has slowed but is typically doing better than other Texas or U.S. cities. Upper-end retail continues to do very well, but the middle of the market is sagging under the weight of $4 gasoline and higher food prices. Discount stores are being helped by bargain seekers who might normally be shopping in full-service department stores.

Car and truck sales in Houston were up 0.5 percent in June when compared with a year earlier, while sales nationally were off 25 percent. The Houston numbers were also remarkable for a swing away from trucks and SUVs (down 15 percent in 12 months) and in favor of autos (up 20.7 percent).

Real Estate
Tighter lending standards are the chief culprit in pushing down home sales in Houston every month since the subprime mortgage market blew up last August. The June existing home sales, for example, were down 15 percent from 12 months ago. Although local job growth has slowed, continued economic expansion has been a key element in stabilizing prices and in the orderly transition to a lower sales path.

Commercial real estate also showed signs that slowing economic growth was allowing supply to catch up with demand, as occupancy was flat or down for apartments, offices, retail and industrial properties. 

Energy Prices and Refining
Since June 1, light sweet crude has traced a circular path from $127 per barrel to $145 and then back to $125. Tension between the U.S. and Iran and a strike in Nigeria drove the higher prices. Natural gas prices traced a similar path from $11.50 per thousand cubic feet to near $14, then back again.

Refiners operated at 88 to 89 percent of capacity, typical for the season. Gasoline and heating oil prices followed crude costs closely enough to keep refiner margins near $15 per barrel. Inventories of crude and oil products stayed well within normal ranges.

Oil Services
Rising energy prices have pushed oil and natural gas drilling sharply higher in recent months. After holding at 1,700–1,800 working rigs for 15 months, the rig count moved above the 1,900 level in the second quarter. Land-based drilling directed to unconventional natural gas has been the primary driver of the improvement in activity. This push in drilling has put hiring new people front and center for the oil services industry. Equipment is less of a problem, and production lines can be expanded if people are available.

Petrochemicals
Prices rose sharply for oil- and natural-gas-based chemicals, based on sustained increases in the price of oil and natural gas feedstocks. The ethylene/polyethylene chain of products saw supply limited as oil-based ethylene crackers (20 percent of U.S. capacity) are operating at relatively low rates, while natural-gas-based crackers are enjoying large cost advantages and operating full out. Meanwhile, demand for polyethylene is strong, as weak domestic demand is offset by strong export demand. For polypropylene, polyvinyl chloride and polystyrene, exports are not filling the gap, and weak domestic demand is keeping capacity utilization low.