January 2007

All the data aren’t in yet, but Houston can look back at very successful economic performance in 2006. Over the 12 months through November, announced payroll employment and potential revisions show the metro area added 93,000 jobs. The unemployment rate, which jumped to 5.7 percent in November 2005 following an influx of hurricane refugees, has dropped back to 4.6 percent. The Dallas Fed’s Metro Business-Cycle Index shows 6.6 percent growth over the 12 months through November 2006. The numbers still fall short of the peak years of past oil booms, but oil and natural gas are clearly in the driver’s seat during this expansion.

Retail and Auto Sales
Houston retailers beat their own plans and did much better than last year. Sales were up by double digits for a few, and most reported solid gains. Shoppers were busy late into the season, and gift cards have not all been redeemed, meaning final holiday totals are still coming in.

Auto sales for Houston remain strong, up 15.4 percent in November on a 12-month basis, and they are running at the strongest pace in four years.

Real Estate
Real estate seems to have cooled a bit. Apartments rents and occupancy are still lackluster; the same measures show retail space has been flat for several months. Even the hot industrial market has cooled, as supply is quickly catching up to customer needs. The office market, which came late to the party, made nice gains in occupancy and rent in recent quarters.

Existing-home sales have been very strong, up 9.8 percent since November 2005, but with a median price increase of only 1.4 percent. Based on new permits, the National Association of Realtors ranked Houston the third-fastest-growing new-home market in the U.S. in 2006, behind only Atlanta and Phoenix.

Oil and Natural Gas
The price of light sweet crude oil strengthened in late November, reaching about $60 per barrel after Thanksgiving. Price rose to about $63 in mid-December, then fell back to $56 the first week of January. Promised OPEC cuts and rapidly falling crude inventories supported prices. Doubts about OPEC’s follow-through on the cuts and warm weather across the country undercut higher prices. Warm weather hurt heating oil demand and price, while strong demand and tighter inventories supported gasoline prices.

Natural gas prices recovered from near $5 per thousand cubic feet in October and early November, pushing to near $8 by mid-November as the reality of the approaching winter won out over forecasts of high inventory and warm weather. However, the warm weather did continue, and price fell back to $6 by late December.

Oil Services and Machinery
After a rapid rise in the domestic rig count over the first eight months of 2006, drilling activity flattened in the last three months, as warm weather raised doubts about the current high price of natural gas. Expectations are for increasing drilling activity in 2007, although the single-digit gains being forecast for the U.S. would be well below the annual gains of the past two years. Many producers used the recent blip up in natural gas prices to sell their production forward, which will provide cash flow and keep them drilling through any near-term weakness in prices.

Petrochemicals
Ethylene and propylene experienced a major inventory adjustment in November and December, with record declines in the contract value of these products. Inventories had built up due to shortages following the hurricanes, high and rising energy prices, and major plant outages. However, the decline in energy prices this past autumn began a process of rapidly reducing large and high-cost inventories. The result was a heavy sell-off that pushed prices down quickly.

Downstream plastics like polyethylene and polypropylene followed in a similar cycle. The decline in domestic prices, the weak dollar and strong Asian demand stimulated exports of these products, and the rush to export was slowed by railcar and rail capacity limits at the Port of Houston.