July 2006

Solid economic performance continues in Houston, but at a slower pace. Six months ago, local job growth was running at a 3.3 percent annual rate. But over the past six months the annual pace has slowed to only 1.7 percent. Houston’s Purchasing Managers Index has averaged 64.3 over the past six months, but the latest reading was down to 61.1. The local unemployment rate has stabilized at 5.1 percent over the past three months. All of these readings on the economy are quite good, but perhaps indicate a recent period of economic consolidation in the current oil boom.

Retail and Autos Sales
Like the rest of the United States, Houston consumers appear to be feeling a squeeze from higher energy prices. Retailers reported slower sales in Houston in recent weeks, with most categories of stores seeing sales falling below plan. Compared with the previous June, new car and truck sales were up by 9 percent this year. For the first half of 2006, trucks and SUVs led car sales in Houston by 27 percent—only slightly lower than the difference in the same period of 2005.

Real Estate
Apartment occupancy continues to decline—now down nearly 2.5 points over the first half of 2006—as Katrina subsidies disappear and evictions mount. Overall absorption was negative in the second quarter. Rental rates are up, but costs are also up significantly because of rising energy prices and hurricane-related insurance premiums.

The local housing market rests on much better economic foundations than many other U.S. housing markets, and it continues to excel. The number of existing homes sold in June was up by 14 percent compared with last June, and the median home price has risen by 7.2 percent. New home sales are up less strongly, but they remain on pace for a record year in 2006.

Energy Prices
The price of sweet crude oil in recent weeks remained near $70 per barrel through early July, based on continued geopolitical tension in Nigeria, Iran and North Korea. But the price jumped to record levels above $75 as new conflicts grew in Gaza and Lebanon. Crude price was also supported by gasoline demand that pushed to five-year-high levels over the Fourth of July. Wholesale prices for conventional gasoline rose by 30 cents per gallon in June and early July, while reformulated gasoline prices—already elevated by concern about a conversion to ethanol oxygenates—rose much less.

Natural gas prices weakened in recent weeks, from $6.25 in early June to near $5.50 by mid-July. Rising crude prices and the threat of tropical weather could not provide enough support to overcome weak seasonal demand and rising inventories. Cool weather in the Ohio Valley and the northeastern U.S. has pushed natural gas inventories to the highest levels of the past eight years.

Refining and Chemicals
Refining utilization on the Gulf Coast pushed up to 95 percent, the highest since the 2005 hurricanes but still below normal for this time of year. Strong margins of $15–$20 per barrel have made refiners reluctant to perform routine maintenance, but they are delaying maintenance anyway because of high cost, labor shortages and difficulty scheduling the work.

Many chemical producers continue to lose the pricing power afforded by last year’s hurricanes, but falling feedstock prices have sheltered margins of natural gas-based products. Ethylene and propylene prices have both been supported by plant outages in recent weeks, although ethylene capacity has now largely returned to normal.

Oil Services and Machinery
Drilling activity continues to rise, keeping the demand for oil services strong. The story remains much the same as the past 24 months, with land-based, gas-directed drilling leading the activity. At the margin, low natural gas prices have led to some switching from gas- to oil-directed drilling, and day-rates for land rigs may have stabilized, or at least are rising more slowly. Jack-up rigs continue to exit the Gulf of Mexico in advance of the hurricane season, with rig owners unwilling to accept reduced day-rates or possible extended work interruptions during the hurricane season. Higher insurance rates also play a role.

—Bill Gilmer