November 2006

The signs of a slowdown in the local economy that emerged over the spring and summer have become increasingly muted. Strong job growth in August, along with revisions to previous months, put Houston’s employment back on a healthy track. Over the past three months, job growth has accelerated to a 3.3 percent annual rate. Houston’s seasonally adjusted unemployment rate fell to 5 percent in August, the lowest in nearly five years. Concerns about the local economy going forward will focus on lower oil and natural gas prices and a pause in drilling activity.

Retail and Auto Sales
Overall retail sales have been good for the last quarter. Sales started slow in July, accelerated some in August and really picked up in September. The fall in gasoline prices seems to have helped, shifting some disposable income back into other retail.

Houston auto sales defied weak national trends in August, rising 18 percent from a year earlier. The monthly total was the highest since Tropical Storm Allison forced the replacement of thousands of vehicles in the city in 2001.

Real Estate
Local new home sales in August were about 7 percent below last August—the first negative comparison for year-over-year figures in 2006. The inventory of speculative homes on the ground is flat compared with August 2005, but when the number of spec homes under construction is added, the total is up 13 percent. Sales of existing homes, in contrast, are up 5.5 percent since August of last year.

Office occupancy and rents have trended up slowly over the past year. The strongest real estate market in Houston is industrial, and it continued its winning ways by tightening even further at midyear.

Energy Prices
After peaking near $78 in July, crude prices slid to near $70 by September 1 and then to near $60 in late September. Slack oil prices have been attributed to weaker U.S. growth, fewer international concerns, rising inventories at home and abroad, and mild weather. As in recent years, gasoline demand fell seasonally with the end of the driving season but remains 4 percent stronger than last year. Wholesale gasoline prices dropped about 50 cents per gallon in September, and prices fell even further at the pump.

Natural gas prices declined steadily throughout the period, from near $6 on September 1 to near $4 in early October. The weakness resulted from a lack of seasonal demand, no hurricane activity to threaten Gulf production and a growing inventory glut. Natural gas storage is now about 12 percent above the five-year average.

Refining and Petrochemicals
The rapid descent in oil-product prices squeezed refiner margins, despite lower crude input prices. Margins tumbled to near $6 in recent weeks, levels that appear weak compared with recent results but continue to look good historically. Gulf Coast refineries continue to operate at very high levels, near 97 percent in recent weeks.

Petrochemical feedstock prices plummeted with the decline in oil and natural gas prices, but product prices have not yet declined significantly. Ethylene prices were supported by several plant outages. Synthetic rubber specifically pointed to a softer consumer market as an element in modest price weakening. Plastics prices have also generally held up, though lower energy costs should eventually feed through to lower product prices. Margins—already very good to start with—have widened further with the drop in feedstock costs.

Oil Services
Growth in the domestic rig count has been strong all year but seemed to pause in recent weeks. This flattening out of the rig count appears to be a response to recent weakness in energy prices. Service companies report that their fundamentals remain sound in terms of backlogs and pricing. Producers have not significantly revised drilling plans and remain unwilling to give up rigs or their place in line for future services.

—Bill Gilmer