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Houston Economic Update

July 2010

The U.S. economy hit some turbulence in June, with a string of poor reports from manufacturing, housing and job markets. Houston data lag by several weeks, but early reports indicate that the U.S. weakness may well have been shared by the local economy.

The Houston Purchasing Managers Index dropped 3.6 points in June as sales, production and lead times all fell sharply. New-home sales plummeted 48 percent from April to May as tax incentives expired. Local unemployment remained high in June. During the economic recovery, Houston so far has matched or occasionally trailed the U.S. pace.

Retail and Auto Sales
Two respondents with national chains say Texas lags the nation in retail sales right now, with Houston, West Texas and the border well behind the rest of the state. Other respondents support their claims. Year-over-year comparisons are better everywhere—but only because last year was so bad. Improvement from last year's low in Houston remains sluggish compared with the state and nation.

June auto sales continued to buck any local economic weakness, up 21 percent from a year earlier. Local auto sales have gained strength over the past four months, and both the 12-month change and year-to-date figures for Houston have matched the national data.

Housing and Real Estate
Houston existing-home sales rose for the third consecutive month in May, getting a nice boost from the homebuyer tax credits, which expired in April. Sales are recorded at closing and were up 19.1 percent from a year earlier. However, contacts indicated a definite cooling trend in sales as the tax credit expired.

For new-home sales, which are recorded when the contract is signed, the cooling trend is already apparent with the 48 percent drop in May. At least a couple of months of slow sales are a foregone conclusion as near-term payback for the incentive program. Homes under construction locally also fell sharply as builders anticipated the decline.

Commercial real estate continues to lag the economic recovery. Bottom-fishing investors are active in Houston, deals are being done and activity is growing. A new mezzanine financing program from Freddie Mac is keeping multifamily financing active. New office, industrial and retail construction are at or near record low levels.

Energy Prices and Refining
Light sweet crude has been trading in a range of $70 to $75 per barrel. U.S. and global economic news reports—especially about a weak U.S. recovery or double-dip recession—have served as the primary source of price movements.

Stocks of crude oil and oil products remain well above the five-year range for this time of year. Demand for oil products is still down about 5 percent from prerecession highs. Gasoline demand has held steady in recent weeks, while diesel demand has shown improvement in fundamentals. Refinery utilization rates have steadily improved to near 90 percent as refinery margins have remained relatively strong at $8 to $10 per barrel.

Natural gas prices have been volatile and influenced mostly by the immediate effects of weather (high temperatures in the eastern U.S. and Hurricane Alex) and by the longer-term implications of negative economic reports. Prices mostly have been range-bound between $4.50 and $5.

Oil Services and Machinery
The U.S. rig count has defied expectations, rising by 32 over the past six weeks despite a drop of 39 rigs in the Gulf of Mexico.

Oil-directed drilling continues to grow as a share of domestic activity, climbing to 37.8 percent. Natural-gas directed drilling continues to surprise, holding steady even amid continued strong production of natural gas, high inventories and prices that may not cover the full-cycle cost of shale activity. Shale may be bolstered by a race to secure the best leases in new basins and by an influx of foreign capital seeking to learn the new shale technology.

Service companies are shifting Gulf Coast workers caught in the government’s deepwater drilling moratorium to other projects when possible, but layoffs are widespread. Producers are considering the redeployment of capital to land or shallow water. The moratorium’s effect is just beginning to reach the manufacturing system.  

Petrochemicals
Polyvinyl chloride (PVC) and chlorine producers both reported a drop in demand from the housing market and commercial construction, with no expectations of a near-term revival in PVC demand. Demand for chlorine was holding up outside of PVC markets. Ethylene, polyethylene, propylene and polypropylene markets saw large and rapid price increases this spring following a number of ethylene plant outages over the winter.

The return of the ethylene plants to production and moderating inventory needs have brought prices down sharply in recent weeks for all of these products. Exports markets closed as U.S. prices rose but have reopened slowly for products affected by outages. Foreign buyers may be waiting to see prices clearly bottom out before making large purchases. U.S. competitive advantages from relatively low natural gas prices continue for these products.

 

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