April 2008

Two of the most important underpinnings of Houston’s economy, national and global growth, have both pulled back significantly. Evidence is mixed on whether Houston has also slowed.

Wage and salary employment is the broadest and most timely measure of economic activity in Houston, and it shows job growth running at half the rate of 2007. However, the 2.3 percent annual rate of job growth over the last three months is still solid. Jobs data have shown a similar deceleration several times in the last four years—only to be revised away later. The Houston Purchasing Managers Index has ratcheted down from levels near 60 to closer to 55 in recent months, indicating continued healthy, if slower, expansion. The unemployment rate, in contrast, has held steady near 4 percent for over a year. The job market remains tight by all accounts.

Retail and Auto Sales
Houston retailers all agreed that sales have slowed sharply. Full-line department stores are below plan by 10 percent or more, and discounters also expressed serious concerns about their sales. Furniture stores have been hurt by the housing pullback. Retail employers are watching expenses and holding back on hiring. Respondents with multiple locations reported that Texas was doing better than the U.S., and Houston better than Texas.

Local auto sales continued to trend down through January, as they had since last July. Then the bottom fell out in February, with sales down 23 percent from last year, marking the worst February in the last 10 years. This tracks with nationwide sales; February and March were among the worst sales months of the last decade.  

Houston Real Estate
Houston’s housing market continues to see weak sales of both new and existing homes. Single-family home sales were down 17 percent in March compared with 12 months earlier, and new home sales were down even more sharply. Both postings and foreclosures were up 20 percent during the same period.  

The Katy and Medical Center areas are the most active markets for office construction, accounting for much of the 5 million square feet now being built in Houston. The apartment, retail and industrial markets show little recent change in occupancy or rental rates despite the rapid continued expansion of space.

Energy Prices and Drilling
The price of light sweet crude passed $100 per barrel in late February and has moved between $100 and $110 since that time. Oil prices are up by over 80 percent for the year and are volatile, affected by weakness in the dollar, economic news and investment flows into the commodity markets.

Natural gas prices followed crude prices, moving from $8 per thousand cubic feet to near $10. Natural gas production was reported to be 8 percent higher than a year ago, and this increased supply has created a debate over the prospects for gas. While pessimists point to the level and success of drilling, optimists point out that inventories have moved back into the normal range, Canadian production is now falling, liquefied natural gas imports have not come into the U.S. at the pace expected, and the current ratio of oil to gas prices favors substitution of gas for oil wherever possible. Weather is always the wild card.

Domestic drilling activity is up, and the number of rigs working matches the highest number operating in this current drilling expansion. Oil service companies report that nothing fundamental has changed and that the additional rigs reflect continued strength in shale and unconventional gas. Canadian activity is falling sharply because of the spring thaw, but the overall pace of drilling in Canada is expected to remain weak due to service costs and taxes. International drilling continues to unfold with few surprises.

Refining
Domestic demand for crude oil is the weakest since 2003 as refineries cut back on production in response to the highest gasoline inventories in 15 years. Gasoline demand is running 1.5 percent below year-ago levels; rising crude oil prices have been the primary driver of gasoline prices as refinery margins continue to narrow. The distillate market was robust, based on cold weather in the U.S. and low inventories in both the U.S. and Europe. On-highway gasoline prices are up by about 25 cents over the past six weeks, and diesel prices are up 57 cents. 

Petrochemicals
Petrochemical and plastic producers coped with weak domestic demand, export demand that was softer than in late 2007 and rising energy prices. Ethylene and propylene producers had more success in pushing through energy cost increases than downstream plastics producers, who are closer to the consumer. Margins were under pressure throughout the production chain, especially for polyethylene and polypropylene. Exports have blossomed in the last 15 months, particularly for ethylene and polyethylene, and remain a significant market for U.S. producers.