April 2006

Revised employment data show Houston’s job growth over the past 12 months at 2.9 percent, faster than both the United States at 1.6 percent and Texas at 2.6 percent. The revisions pull the job growth more closely in line with recent movements in the Houston unemployment rate, coincident index of economic activity and local purchasing managers index, all of which show the Houston economy accelerating and pulling away from the nation. Beige Book respondents were uniformly upbeat in their assessment of Houston’s performance in recent weeks.

Retail and Auto Sales
Houston retailers reported good news for the period, with every category hitting or exceeding expectations. Department, discount, furniture and food stores, as well as independents, all shared in the good results. Some stores saw sales as much as 20 percent higher than anticipated.

Truck and auto sales continued on an upward trend. March sales for the metropolitan area were up 5.1 percent from last year, and first-quarter sales rose an even healthier 7.2 percent. Trucks still make up 57 percent of total sales in Houston, a share little changed by high gasoline prices.

Energy Prices
The price of crude oil was near $60 in early March but climbed steadily to near $70 by mid-April. Downward pressure on crude demand by a heavy refinery maintenance season was offset by international tension in Iran and Nigeria. Gasoline prices rose throughout the period, following crude upward and reflecting concern that the transition to methanol from MTBE would not go smoothly. Prices at the pump have risen about 25 cents per gallon since early March. Diesel and heating oil also felt upward price pressure from crude but did not rise as far as gasoline because of the winding down of the heating season.

Natural gas prices have remained consistently near $7 per thousand cubic feet in recent weeks. With no heating or cooling demand, the gas price was supported primarily by rising crude oil price. Because of the warm winter, natural gas storage levels are very high—60 percent above the five-year average.

Refining and Petrochemicals
Refiners underwent a long maintenance season. Much of the work postponed after last fall’s hurricanes was finally undertaken this spring. After soaring as high as 5 million barrels per day after the storms, refined product imports settled back into historical ranges. Refinery margins, which had weakened in January and February, surged back to $15–$17 per barrel.

Results vary widely by product for petrochemicals. Prices are falling and demand is lackluster for most. Price comparisons, however, have to be made against pre-hurricane levels (ABS, PET bottle resin and paraxylene are about equal or below, while polyethylene, polyvinyl chloride and polystyrene are still well above). The ethylene market is being affected by extensive maintenance. Although price no longer justifies imports in many cases, numerous downstream processors are reluctant to close the door to imports, seeing them as possible insurance with a new hurricane season approaching. Lower product prices have not meant less profit for many products because the falling price of natural gas feedstock has kept margins wide.

Oil Services and Machinery
There was little change in the oil service industry. Contacts reported continued very strong demand, tight capacity, growing backlogs and more work turned down because it cannot be scheduled. The rig count continues to rise due to the entry of rebuilt and refurbished as well as newly built rigs. The number of rigs working in the Gulf of Mexico has returned to pre-hurricane levels, but rigs continue to leave the Gulf for other waters and drive day rates sharply upward. Capital spending programs are strong; the primary constraint on expanding capacity remains people.

—Bill Gilmer