December 2009

Houston at year-end showed clear signs of sustained economic improvement: Job losses continued to shrink, the unemployment rate fell slightly and the local purchasing managers were increasingly optimistic. Houston’s recovery is probably still trailing that of the U.S. economy by a few months, but the difference is narrowing, especially in local job growth. Stabilization and improvement in oil-related jobs have been key to these gains.

Retail and Auto Sales
Retail sales rode a roller coaster through the holiday season, meeting Black Friday expectations, then falling back, only to see acceleration going into the final days. Expectations were low compared with a year ago, and holiday sales did not surprise anyone on the upside. Retailers point to an improving trend in consumer sentiment, however, and are planning for a slow but sustained increase in sales through the spring and summer.

November auto sales in Houston were off 18 percent from a year earlier, essentially returning to the low levels of sales seen before the cash-for-clunkers incentives. U.S. sales seem to be slowly improving from a mid-2008 bottom, while Houston has yet to make a turn upward.

Real Estate
Government incentive programs also distort the data for local home sales, as Houston homebuyers rushed to beat the original November deadline for the first-time-homebuyers’ tax credit. Existing home sales got the biggest boost, pulling home sales to within 10 percent of the sales made in the overheated market of November 2007. However, new home sales remained flat with the recession- and Hurricane Ike-depressed sales level of November 2008.

Broad downward pressure remains on all segments of the commercial real estate market. Occupancy rates continue to decline in the apartment and retail sectors, while office and industrial show early signs of stability. All sectors are left with significant unused space and downward pressure on rents.

Oil and Refining
Crude oil futures were volatile but stayed in a range of $70–$80 per barrel. Strength in oil markets has come from improved economic data and conflicts involving oil producers such as Russia, Iran and Nigeria.

Crude inventories remain at the top of the five-year normal range, as do gasoline inventories. Heating oil and diesel inventories, however, are 10 to 15 percent above normal. Demand for petroleum products remains weak (about 4 percent below the levels of this time last year—after the collapse), led by weakness in diesel in particular. Refiners have seen margins fall to about $6 per barrel in recent weeks, and capacity utilization has been maintained at only about 80 percent.

Petrochemicals
Demand for petrochemicals and plastics remains seasonally weak. Improvement in demand experienced over the spring and summer continues for natural gas-based products, with modest gains in domestic demand and strong growth in exports. The advantages that the U.S. holds by producing petrochemicals from natural gas have been undercut by renewed dollar strength, stable oil prices and rising natural gas prices. Large new plants coming online in the Middle East have also stirred concerns. The result has been a turn to weakness in exports in December. There have been no significant price increases. Proposed December price increases for ethylene, polyethylene and polypropylene have failed or been pushed into the future.

Oil Services and Machinery
The Baker Hughes rig count continues to rise, with Texas, Louisiana and New Mexico all gaining. The same general trends continue that have prevailed since the rig count turned around last summer, as oil-directed drilling has risen now to 35 percent of U.S. activity, and gas-directed drilling continues to be based in shale. The gains remain focused in relatively few areas, with traditional gas-bearing regions continuing to see downsizing and consolidation. International activity is expected to remain strong next year and is driving major revenues for the industry.

Despite recent cold weather, a combination of high natural gas inventories, weak industrial demand and high gas production points to potentially weak pricing ahead. Producers have used the futures market to lock in acceptable pricing, however, and continue to drill. Pricing for oil services has stabilized but is still under pressure from low levels of activity and continued excess capacity.