November 2009

Houston continues to show signs of moving out of the recent U.S. recession, although at a slower pace than the rest of the country. The local job market is not healing as fast as the U.S., with monthly percentage losses in payrolls getting smaller each month but remaining larger than comparable national figures. The local Purchasing Managers Index finally reached breakeven, once more indicating expansion; still, this milestone was reached by the U.S. five months ago. High inventories of oil and natural gas continue to cloud the horizon for Houston’s commodity-driven economy.

Auto and Retail Sales
Wary retailers are greeting enthusiastic but budget-conscious holiday shoppers. Inventory and selection are limited by retailer caution. Price competition has quickly emerged. Expectations this year are for a modest improvement over an ugly 2008 holiday season. 

October auto sales were down 31 percent from last October, a number that looks terrible compared with the U.S. decline of only 3 percent. However, the recession gripped the U.S. much earlier, driving down auto sales sooner and making the U.S. number for October look less grim. Both the U.S. and Houston are showing there was less pull-ahead of sales due to the cash-for-clunkers program than expected, and sales over the past couple of months have held up better than anticipated.

Real Estate
Both new and existing home sales were up sharply in both September and October in Houston compared with 12 months ago. Local agents point to a definite impact on the local market from the new-homeowner tax credit, but it is difficult to judge how much it affected sales. Both September and October 2008 were heavily affected by Hurricane Ike and its prolonged aftermath, so this year’s 15–20 percent gain in sales is significantly exaggerated.  

Commercial real estate remains in recession- and credit-related doldrums. New apartment projects continue to stream online, putting pressure on occupancy, although rents remain healthy. Retail follows this same pattern, with falling occupancy and firm rents. Office and industrial markets, however, have seen rents decline by 10–15 percent from the peaks of 18 months ago.

Oil and Natural Gas Prices
The price of West Texas Intermediate rose from near $70 per barrel in early October to near $80 in late November. This increase was driven by growing expectations for U.S. economic recovery, but defied other fundamentals. Demand for oil products weakened seasonally and remains 4 percent below last year at this time. Inventories of gasoline stocks are well above normal, and heating oil stocks are more than 20 percent above the five-year average. 

The increase in crude prices was only partly passed through to refined products, resulting in increased pressure on already weak refiner margins. Refiners responded by cutting back production, with capacity utilization falling from 85 percent to near 80 percent.

The natural gas price was below $4 per thousand cubic feet in late September and rose to only $4.50 by late November. Prices were between $6 and $7 a year ago. Natural gas in storage is about 10 percent above last year and 12 percent above the five-year average. Inventories continue to rise due to weak industrial demand, unseasonably warm weather and prolific production from shale formations.

Oil Services and Machinery
The Baker Hughes rig count continues to increase, rising more than 8 percent in recent weeks and up even more strongly in Texas and Louisiana. The increase is driven primarily by oil-directed drilling (normally only 20 percent of U.S. activity) and by efforts to secure leases in newly opened shale-gas basins. Neither seems likely to carry the rig count to a quick recovery from levels that are still quite depressed from a year ago.

Petrochemicals
The story for basic petrochemicals and plastics remains the same. Producers report moderate increases in domestic demand from month to month and continued strong demand for exports. Exports are driven by U.S. advantages in feedstock costs (cheap natural gas versus relatively expensive oil) and by a weaker dollar, especially versus the euro. Exports to Asia have weakened in recent weeks. Prices are up for polyethylene (on improved demand) and polyvinyl chloride (due to higher ethylene input prices, despite weak demand). Prices are lower for polypropylene (supply problems resolved) and polystyrene (benzene feedstock price down sharply).