Economic Research Publications
Houston Economic Update
Houston’s labor market picked up nicely last spring but is again showing significant weakness. Year-to-date job growth is now at only a 1 percent annual rate, and the last three months have seen significant local job losses. Improvement in the local unemployment rate continues, but it has been partly for the wrong reason. We count fewer unemployed because discouraged workers simply drop out of the local labor force, not because they are filling new jobs. Policy uncertainty surrounding health care costs, energy costs, restrictions on drilling and the space program make it hard for local companies to commit to new capital projects or new workers.
Retail and Auto Sales
Retailers report recent broad improvement in Houston and other Gulf Coast cities with strong ties to energy. After sales lagged in recent months in these cities, retailers are optimistic that they might pull back even with their original 2010 plans by year-end. Hiring remains confined to expansion or replacement workers, although part-time hiring for the holidays is now picking up.
Auto sales in August had their best month of the year, jumping 31 percent between July and August. Comparisons to a year ago are weak because of the August 2009 expiration of the cash-for-clunkers program, but the current trend points to accelerating sales through the rest of 2010.
New- and Existing-Home Sales
Local housing markets remain mired in the weakness induced by the April expiration of the first-time homebuyer tax credit, which pulled many summer sales forward into the spring. Homebuilders report traffic, and new-home sales are slowly picking up, but the market remains well under the levels of a year earlier. Existing-home sales showed similar weakness persisting into September, caught by both the tax credit and normal seasonal weakness as school opened. Sales were down 19 percent from a year earlier, but local home prices remained quite stable.
Energy Prices and Drilling Activity
The disparity between oil and natural gas prices widened further. Oil, after remaining in a tight range of $70 to $75 per barrel for much of the summer and early fall, moved above $80 in early October. Strength in global economic expansion and weakness in the dollar both contributed to the improvement. In contrast, natural gas is mostly dependent on a relatively weak U.S. economy and had only mild autumn weather to support demand. Domestic market production hit a 37-year high, based on strong drilling activity, especially in prolific shale areas. As a result, natural gas prices slipped under $4 per thousand cubic feet.
The domestic rig count has stalled in recent weeks. The long-expected slowdown in natural-gas-directed drilling finally arrived. Natural gas drilling had been supported in 2010 by favorable hedges put in place over last winter and by drilling in new shale plays that was often driven by the need to secure leases. As hedges expire and leases are secured, drilling decisions are dominated by weak current prices. Activity continues to shift to oil-directed drilling and away from gas. Demand for oil services and machinery remains solid, pricing is stable or improving and activity should remain healthy as long as natural-gas-directed activity makes a soft landing. Strong land-based activity in the U.S., combined with drilling outside the U.S. and Canada that is more robust than before the financial crisis and global recession, has cushioned losses from the Gulf moratorium.
Oil Products and Refining
Refinery margins weakened in August and September. Refinery operating rates were over 90 percent in July but fell to near 85 percent in recent weeks based on seasonal weakness in gasoline, poor margins and the beginning of the autumn maintenance season. On-highway gasoline and diesel prices rose with the price of crude oil in early October. Demand for oil products is up only 2.8 percent year-over-year, and combined crude and oil products inventories hit record highs. Inventories of crude, gasoline and distillates are all moving against seasonal expectations.
Petrochemicals and Plastics
Strong domestic demand for ethylene, polyethylene and caustic continued into October and is expected to continue into 2011. Current high prices for these products kept exports stagnant in recent months, but renewed Chinese interest in polypropylene was noted. Polyvinyl chloride still sees poor domestic demand because of weakness in housing and commercial construction. The price of PVC is stable, and exports are very strong, accounting for 25 to 30 percent of production.