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Houston Economic Update

August 2010

Houston and the U.S. economy have been on the same track of sluggish growth since the recession bottomed out in the summer of 2009. With oil prices at a healthy $75 per barrel, and drilling activity strong at home and abroad, there is a good case to be made that Houston’s expansion should be moving smartly ahead of the nation’s. But a series of still-open policy questions seem to strike at all the key sectors of the local economy—the offshore drilling moratorium, cap and trade, health care reform, the future of manned space flight. Throw in the Continental Airlines merger and several major layoffs, and the resulting fog of uncertainty has made it tough for local business to move ahead. Local growth will likely remain sluggish until the economic fog clears enough to set a firm course forward.

Retail and Autos
Retailers continue to report disappointing results, especially when Houston is compared with activity in other states or other parts of Texas. Back-to-school shopping did not meet expectations, even though expectations were not set much higher than the same time last year.

Local car and truck sales have better reflected national trends, with sales steadily rebounding all year and running 16 percent ahead of 2009.

Local Real Estate
Both new- and existing-home sales in Houston took a predictable dive with the expiration of the first-time-homebuyers’ tax credit.  The incentive pulled the usual strong summer sales figures forward into the spring, and its expiration left year-over-year sales of new homes down 35 percent in July and existing home sales down 25 percent. Builders anticipated the sales decline, leaving permitting of single-family homes quite weak and closely controlling inventories of spec homes.

Apartment occupancy has risen modestly with the resumption of local job growth, and with credit and unemployment limiting consumer access to single-family housing. A number of large apartment projects remain in the pipeline, however, and seem likely to keep occupancy rates at a low level as they lease up. Rents remain stable. Foreclosures of existing projects remain a continuing problem throughout the city.

Energy Prices and Refining
Prices for light sweet crude remained range-bound between $70 and $80, with fluctuations driven by weather or news on the U.S. and global economy. Natural gas prices trended lower in recent weeks, retreating from a price peak near $4.50 per thousand cubic feet that was driven by summer heat. As summer ended, prices quickly moved under $4. Natural gas storage is about 6 percent below the record levels of last year but still 7 percent above the five-year average.

Refiners have seen better results in recent months, including rising demand for refined products, higher capacity utilization and margins in excess of $10 per barrel. However, in midsummer the demand for refined products weakened, and inventories of gasoline and distillates (diesel and heating oil) began to rise rapidly. Seasonal gains in gasoline consumption did not materialize, and distillate consumption slipped back. The price of gasoline fell below the price of heating oil, which should not happen before September. Weaker margins pointed to reduced refinery runs in the near future.

Petrochemicals and Plastics
Petrochemical and plastic producers were optimistic, with their demand providing little evidence of a significant slowdown in the U.S. economy. Strong demand was reported by producers of ethylene, polyethylene, polypropylene and caustic. Only polyvinylchloride—tied to housing and commercial construction—saw continued domestic weakness.  Domestic demand is strong and growing, while export growth has slowed. Current prices are less competitive in Europe and Asia. Prices are up for polypropylene and polystyrene, down for polyvinyl chloride. Capacity utilization is high, and producers have proposed a series of price increases.

Drilling and Oil Services
Drilling activity in the U.S. continues to rise strongly, with the count of active rigs up 84 over six weeks. Drilling gains are primarily led by development of unconventional oil and natural gas. International activity continues to increase. Service companies report capacity is tight or tightening in pressure pumping and a number of other drilling-related services. Margins are improving. Companies can quantify their own lost revenues from the moratorium on offshore drilling and say they are trying to relocate workers displaced by the shutdown. Strong ongoing domestic and international activity supports claims that some capital spending is being redeployed from the Gulf of Mexico to other regions, but respondents could cite few specific examples.


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