Economic Research Publications
Houston Economic Update
Houston continues to defy expectations for an upsurge, with the sluggish job growth of the prior six months turning slightly negative over the last three. The unemployment rate has been stuck near 8.5 percent after a modest decline from a cyclical peak of 9 percent last spring. Local purchasing managers’ index results are tracking the mediocre performance reported nationwide.
One might think that oil prices near $80, strong profits earned by local oil service companies, high levels of petrochemical exports and solid profits from Gulf Coast chemical companies would combine to give the Houston economy an edge over the rest of the country. So far, this apparent advantage is not visible in Houston’s recent economic performance.
Retail and Auto Sales
Retailers report continued slow improvement in retail sales and expect a nice improvement over last year’s holiday season. The recent cold weather has helped clothing sales significantly.
Year-over-year comparisons of October auto sales were very strong for both Houston (up 34 percent) and the U.S. (13 percent). However, October 2009 marked an easy comparison, a period of weak auto sales on the heels of the cash-for-clunkers program, which had pulled sales into summer 2009.
Houston’s office market saw absorption turn positive in the third quarter—but largely on the basis of suburban improvement. The outlook is still subdued as the potential for downsizing by large downtown tenants remains in place. The local industrial market continues to make modest gains.
Houston’s residential home sales remain slow. Government incentives for first-time homebuyers pulled sales into spring, summer sales were anemic and now normal seasonal weakness has set in. Existing-home sales are down 25 percent over the last 12 months, and permits for new single-family construction are off 24 percent.
Energy Prices and Refining
Light sweet crude climbed over $80 per barrel in early October and then moved above $85 in early November due to robust global growth and a weaker dollar. Natural gas prices fell to near $3.50 per thousand cubic feet in mid-October. Weather contributed little to demand this fall—no heating or cooling loads, no hurricane concerns in the Gulf—and the price was further pressured by natural gas inventories that rose to record levels going into the heating season.
The demand for oil products fell back to levels comparable to those a year earlier. A heavy autumn maintenance season reduced refinery capacity utilization rates to near 80 percent, compared with 90 percent this summer. Lower production and sustained demand for gasoline and diesel pulled inventories back to the top of the normal range. Despite increases in on-highway gasoline and diesel prices, refiner margins were pressured by the rise in crude oil prices.
Gulf Coast petrochemical producers continue to enjoy large cost advantages over foreign producers, as the prices of natural gas and crude oil continue to diverge. Dollar weakness has also worked to raise interest in U.S. exports.
Producers report a mixed story in terms of demand. Ethylene and polyethylene producers are seeing both good domestic demand and continued strong export demand. This combined demand has strained domestic capacity, and recent ethylene outages (both planned and unplanned) sharply pushed up the spot price of ethylene. Domestic demand for polyvinyl chloride, in contrast, remains depressed because of its strong link to U.S. construction. Export demand for PVC is strong because of the cost advantages enjoyed by U.S. producers, but export sales are not enough to prevent losses for most producers.
Oil Services and Machinery
The domestic rig count has slowed significantly in recent weeks and is expected to grow slowly or top out at current levels. Low natural gas prices are limiting gas-directed drilling. The trend continues toward more oil-directed drilling and to more complex and service-intensive wells, especially horizontal drilling, fracturing and complex completions. Oil service companies earned very strong profits in the third quarter, led by U.S. land operations. International drilling activity is still strong but currently less profitable.
Producers are still interested in returning to the Gulf now that the deepwater drilling moratorium is over and are working their way through the new regulations and their cost implications. Service companies are maintaining the skills and capacity to go back to the Gulf but do not expect it to happen before early next year.