Economic Research Publications
Houston Economic Update
The Houston Business-Cycle Index, computed by the Federal Reserve Bank of Dallas, now shows a cyclical trough for the Houston economy in December 2009, indicating that Houston hit bottom about six months after a similar index turned up for the U.S. economy. So far in 2010, Houston’s modest gains in payroll employment have been a mirror image of the U.S. labor market, and local unemployment remains stubbornly high. A number of regional uncertainties—including airline mergers, the status of the space program and a moratorium on deepwater drilling—are almost certainly slowing local investment.
Retail and Autos
The news from local retailers is mixed. Discounters report that those customers who moved downscale with the onset of recession are now slowly moving back up the ladder for more brand names and higher-quality goods. At the same time, retailers with national chains expressed disappointment at the poor performance of the Houston area compared with other parts of the country. Grocery stores continue with strong sales—especially private label sales—again suggesting the local consumer is still quite cautious.
Auto sales continue to improve compared with 2009, consistently up every month and averaging year-over-year gains of about 15 percent. Again, Houston mirrors results for the U.S.
The approach of the second expiration of the first-time homebuyer tax credit sharply boosted the local sales of both new and existing homes. New housing permits for March and April jumped 40 percent over 2009, and existing-home sales were up a solid 20 percent. Builders already have noted lower traffic as the tax credit ended and have begun to cut their inventory in anticipation of a couple of months of weak sales.
Plenty of money seems to be available on the sidelines for commercial real estate, with buyers waiting to jump into the market for the right bargain. So far, however, few investors are willing to make the plunge. Real estate investors are highly sensitive to the potential job cuts by airlines, technology, oil and space. Where investments are made, they are most often linked with much larger developments, like planned communities.
Energy Prices and Refining
Crude oil prices in early April were near $85 per barrel but began to decline in early May, based on anxiety about the European debt crisis, news of slower growth in China and a continued build in crude oil inventories. These concerns, combined with high inventories of crude and product, left light sweet crude priced near $70 per barrel in recent weeks.
Demand for oil products remains 8 percent below the prerecession levels, although it is up 5.6 percent over the last 12 months. Capacity utilization rates for refiners rose steadily since early April, moving from the low-80 percent range to high-80s. Refinery margins also rose and are at the highest levels of the year.
Fundamentals are terrible in natural gas markets. Marketed production continues to rise, as does the number of rigs directed to gas. Natural gas inventories are building rapidly, with current stocks 16 percent above normal. The positives are few, and price languished around $4 per thousand cubic feet.
Over the winter, a dozen ethylene plants were knocked out of service by severe cold weather. The result was a spike in the price of both ethylene and propylene, driving up the price of a number of plastics—polyethylene, polyvinyl chloride, polycarbonate, polypropylene and nylon. For ethylene and polyethylene, large export markets were wiped out by the price spike caused by the shortages. As plants have come back online, the price increases have begun to turn around, and export markets have reopened. Contacts generally cited improved domestic demand for most products from early 2010 and continuing through April.
Oil Services and Machinery
The domestic rig count continued to rise, with oil-directed drilling still leading the way. The drop in the price of oil from $85 to $70 should not disqualify many oil-directed projects from being highly profitable, whether international or domestic. The poor fundamentals in the natural gas market point to a growing likelihood of a slowdown in gas-directed drilling ahead. As current hedges disappear and current leases are locked in by drilling, we are likely to see a slowdown in gas-directed drilling only partially offset by increased levels of oil-directed activity. This “soft-landing” at home is further cushioned by continued strong oil-directed international activity.