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Houston Economic Update

January 2011

The Houston economy has become a bit of a mystery in recent months. Houston continued to struggle even as the U.S. recovery solidified, the global economy rocketed forward and oil service companies earned record profits. The metropolitan area has lost 5,000 jobs since July, and the unemployment rate jumped from 8.2 to 8.9 percent between June and November. A series of policy barriers to local growth remain in place—cap and trade, the end of manned space flight, a slow return to Gulf of Mexico drilling—but even these should be a receding threat. Perhaps the major revision of jobs data that comes every March will resolve some of the contradictions.

Houston Retail and Auto Sales
From December 2009 to December 2010, Houston auto and truck sales exactly matched the very healthy U.S. increase of 12.6 percent. Houston’s truck and SUV sales normally outstrip those of the U.S., but 2010 saw a national increase of 23.6 percent, while Houston’s sales rose only 15.9 percent.

While the U.S. economy registered its best retail performance since 2006, Houston’s results were varied, based on whether comparisons are made across store categories or with past years. The traffic was generally good, but actual sales varied among malls, discounters and high-end retail. Mall traffic was good, but spending tight-fisted; discounters struggled a bit; and luxury retail bounced up nicely.

Existing home sales remained weak through November, down 23 percent over 12 months. Despite the decline in sales, median home prices increased by 0.5 percent. New-home sales rose about 2 percent over the same period, but—like existing-home sales—are still suffering a significant hangover after the first-time homebuyer’s tax credit expired. Local homebuilders are optimistic about a slow turnaround in sales during 2011.

Energy Prices and Refining
Oil prices rose by about $10 per barrel in recent weeks, based on continued strength from Asia, better demand in the U.S. and a weaker dollar. Highway prices of both gasoline and diesel rose with the price of crude, and gasoline prices returned to near $3 per gallon.

Demand for oil products continued to improve against normal seasonal trends. Refinery utilization rates moved up to the highest December levels since 2007. Margins held steady, despite the surge in the price of crude oil inputs. Suppliers reported that refiner confidence has improved due to a willingness to spend more freely on maintenance and capital—even if the new spending sticks to the basics.

The price of natural gas rose seasonally, spurred by very cold weather in the Middle West and Northeast. The price then fell back to near $4 per thousand cubic feet, however, as the weather eased. The fundamentals for the gas market remain poor for producers. Demand remains relatively weak, domestic production continues to rise to record levels with the opening of new shale plays and inventories remain large early in the heating season—about 9 percent above normal.

Petrochemicals and Plastics
The most important recent changes in resin and plastics markets have been driven by an increase in ethylene prices after a series of planned and unplanned outages beginning in mid-November. These outages quickly pushed up prices for ethylene, polyethylene and polyvinyl chloride. Despite these price hikes, the continued large difference between oil and natural gas prices drives significant competitive advantages for North American producers that rely on natural gas. The result is a large base of exports that complements growing domestic demand for Gulf Coast resins and plastics products. Strong global demand elevated prices for caustic and oil-based products like styrene.

Oil Services and Machinery
North American drilling activity remains very strong, although the domestic rig count has increased more slowly in recent weeks. However, the least-service-intensive work has slowed the most, and the rigs left working continue to apply new and increasingly expensive services to each job. The shift has been away from dry gas and toward more oil-directed drilling or to natural gas formations rich in natural gas liquids. The current high price of oil and natural gas liquids justifies the complexity and intensity of the services being applied. Pricing of oil services is strong, and profit margins are very good. The geography of drilling activity is shifting, depending on the availability of the liquid-rich resources that are in demand. The Permian Basin and the Eagle Ford in South Texas are booming fields, for example, and have been big winners.


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