December 2008

Houston's outlook is dimming as economic fundamentals continue to crumble. The national recession deepened suddenly in late 2008, and global economic prospects are deteriorating, with little or no growth now expected in 2009. Oil and natural gas prices continue to fall, and exploration is shrinking rapidly. Houston will find it difficult to avoid job losses in 2009, with serious losses possible unless energy and the economy find bottom soon.

Retail and Autos
Houston retailers, especially high-end stores, shared in the pain of a steep national decline in December retail activity. It came as little consolation that Houston fared better than the rest of the state. Anticipating lower sales, retailers cut employment and pared prices early and deeply to reduce inventories. Grocery stores seemed to be recession-proof, posting double-digit increases as consumers ate more at home.
 
Local auto and truck sales through November were off 19 percent from a year earlier, about half the percentage decline seen nationally.

Housing and Real Estate
Since November 2007, Houston sales of existing homes have fallen 33 percent. The decline is now showing up in home prices, with the median price dropping more than 7 percent over the 12-month period. The picture is similar for new residential properties, with local sales off 30 percent over 12 months and traffic through new subdivisions down 40 percent.
 
In other sectors, financing has tightened sharply, if not dried up, and lack of credit will limit supply going forward. The office-market pipeline is largely preleased, but heavy construction is under way in retail and multifamily, and much of this product is yet to be leased. Greater supply in a weak economy will quickly put downward pressure on retail and apartment rents.

Oil Services and Machinery
Oil services and machinery continue to spiral downward as drilling activity declines in response to lower energy prices. Most of the decline is land-based and natural gas-directed. Relatively expensive nonconventional drilling in shale and tight sands led the upturn—and will also lead the downturn. Natural gas prices haven't dipped as much as oil prices and have largely been held in place by winter prospects. Without enough cold weather, natural gas prices could fall hard. Industrial demand is shrinking rapidly, and supplies are higher than last year as the U.S. and Canada maintain ample production and normal inventories.  

Refining and Petrochemicals
Light sweet crude was $55 per barrel in mid-November, but it fell to $37 by year-end, the lowest level since 2004. At the root of the problem is a huge oversupply of crude oil, driven by the U.S. and global slowdowns. Consecutive cuts by OPEC were not sufficient to stem the decline. Oil product prices fell just as fast, leaving refiners' margins weak and under downward pressure. Gasoline margins were particularly weak. Refinery capacity utilization held steady at about 85 percent.

Petrochemicals and derivative plastics remained in free fall, with demand, feedstock prices and product prices all plummeting. Prices for ethylene, a major building block, fell 25 percent in October and November contracts, led by declining energy feedstock prices. At least 10 large plants have shut down on the Gulf Coast in recent weeks, and others have cut runs. Layoffs have been widespread among employees and contractors. The story is much the same for commodity plastics. Polypropylene prices have dropped by two-thirds and polyethylene prices by half since last summer, with big declines coming in recent weeks.