August 2006

Houston continues to grow rapidly but has slowed from autobahn to open highway speeds. Between February and July of this year, Houston’s 12-month growth rate slipped from 3.4 percent to 2.5 percent. The seasonally adjusted growth rate ticked up from 5.1 to 5.2 percent in July. The goods sectors continue to lead local growth, especially construction and oil- and gas-related activity. Slower expansion is based primarily in a widespread slowdown in services.

Retail and Auto Sales
Houston retailers reported solid results for August, after a lackluster July. Both department stores and furniture stores saw a nice pickup in sales. The annual sales tax holiday contributed to these results but becomes less important each year in Houston.

A 17.7 percent drop in truck and SUV sales in July compared with 12 months earlier pulled overall Houston auto sales down 9.2 percent. The weak comparison owes much to the extraordinary incentives that were being offered last July: employee discounts for everyone.

Real Estate
Houston existing home sales in July improved 3.3 percent compared with July of last year. New home sales are up 8 percent through the first half of 2006. Local permitting activity fell in July, after rising 18.6 percent year-to-date through June.

The industrial sector is the most active real estate in Houston. Although the vacancy rate and lease rates were both unchanged in the second quarter, the sector absorbed over a million net square feet. Another million square feet is under construction.

Energy Prices
The price of light, sweet crude oil was in a range of $72–$77 per barrel, with the high end representing all-time high crude prices in nominal dollars. Contributing to high and volatile prices were strong gasoline demand, the shutdown of Prudhoe Bay production, and geopolitical fears stemming from Iraq, Iran, North Korea, Nigeria and the Israel –Lebanon conflict.

Gasoline demand was up about 2 percent from last year, despite high pump prices. Wholesale prices were volatile, peaking at near $2.45 per gallon following a series of refinery outages, but fell back to near $2 in late August with crude prices easing and the end of the driving season in sight.

The price of natural gas had fallen as low as $5.18 in early July but recovered to $6 and higher on the basis of a long-lasting heat wave. It briefly moved to $7 and $8 per thousand cubic feet on the basis of tropical storm activity that never developed. Storage inventories continue to build and are now at 2.8 trillion cubic feet, or 14 percent above normal.

Refining and Petrochemicals
Most of the major petrochemical chains report solid demand and good profitability. Butadiene demand is strong. Ethylene demand has bounced back, with significant help from resumed exports. High domestic prices due to feedstock and limited capacity after the hurricanes had pushed the U.S. out of international markets. The decline in natural gas prices and the run-up in oil prices have reopened export markets for U.S. ethylene.

Refiners report that the conversion from MTBE to ethanol and to low-sulfur diesel encountered few problems. Refiners’ margins were strong throughout the period—near $15 per barrel. Capacity utilization on the Texas and Louisiana Gulf Coast rose above 96 percent in early August.

Oil Services and Machinery
Oil services and machinery continues to expand rapidly despite recent weakness in natural gas prices. The domestic rig count added more than 100 working rigs in six weeks, and two-thirds were added in Texas. The percentage of rigs drilling for oil instead of natural gas has shifted only slightly in favor of oil, and lower natural gas prices have given operators a little more leverage in negotiating day rates for land rigs. Day rates have flattened out, but not fallen.

—Bill Gilmer