April 2007

Houston’s payroll employment has grown at a 3.3 percent rate over the past 12 months but slowed to a seasonally adjusted 2.6 percent over the last six months and to 1.5 percent over the last three.

A cautious drilling industry has kept local energy-related jobs flat for six months. Late cold weather was enough of a boost to keep drillers active, and weather will continue to drive natural gas inventories and oilfield activity through the summer.

Retail and Auto Sales
Retailers reported that late spring sales were hurt by unseasonably cold and rainy weather but that sales were otherwise healthy. It was a pattern shared by department, discount, furniture and other store categories.

Early 2007 auto sales in Houston continued the very strong upward trend of the last two years, when they were buoyed by a vigorous local job market. Strength early this year was influenced by a spillover of some December sales that were not processed until January, but sales are still up 18 percent year-to-date.

Real Estate
Houston’s existing home sales in March were down 8.8 percent from last year, raising fears that Houston might not be immune to national housing problems. National homebuilders had already pulled back because of balance sheet problems elsewhere. Now diminished subprime lending could lead to fewer local buyers. One month is not a trend, but the next several months of data will be watched carefully for signs of emerging problems.

After trailing the suburban office markets for several years, Houston’s downtown office market is seeing the last few large blocks of space disappear rapidly. Several developers are now jockeying for position to put up one or more new buildings.

Meanwhile, the local apartment market is benefiting from the end of Katrina move-outs and from strong demand. Whether the market has hit a shallow bottom depends on continuing high levels of construction and the local job picture.

Energy Prices
West Texas Intermediate crude was near $61 per barrel six weeks ago and briefly fell as low as $57 on fears of a weak economy and mild weather. The price then jumped to $66 due to late cold weather and geopolitical concerns before falling back to $61. Heating oil prices rose on the back of cold weather and higher crude prices. Strong demand for gasoline (up over 2 percent from last year) and limited refinery utilization combined to push gasoline prices up by over 40 cents per gallon in recent weeks.

Cold weather, improving inventories and rising crude prices all worked to support natural gas prices. Prices slipped below $7 per thousand cubic feet in early March with mild weather but pulled back to $7.50 with continued late cold weather.

Refining and Petrochemicals
Refineries have come back slowly from spring scheduled maintenance turnarounds, partly because of problems in scheduling engineering and construction work. Refinery margins have steadily improved throughout the period and have widened sharply in recent weeks, despite higher crude prices

We saw a massive inventory adjustment over the winter that affected most petrochemical product chains. For many products, we are seeing the start of inventory replenishment—possibly driven to some extent by rising energy costs. Export demand has been strong, compared with more modest domestic demand. Margins have been strained by feedstock cost pressures in most cases.

Oil Services and Machinery
Producers remain concerned about the high U.S. natural gas inventory, providing a distinct split between directionless domestic and Canadian drilling and a very strong and expanding international market. New land rigs are entering the U.S. market (another 250–350 over the next year), putting downward pressure on day rates. The lack of growth in drilling has hurt domestic pricing in a number of business lines. Backlogs are still long, pricing remains profitable and delivery can still be slow—but the frantic push of a year ago has subsided.