July 2007

Houston's economy has slowed along with a decline in U.S. growth and a pause in the expansion of domestic drilling activity. The job market, however, suggests that the bottom may have passed in the first quarter of this year. The second quarter saw local job growth pick back up to a seasonally adjusted 2.8 percent annual rate from only 1.8 percent in the first quarter. Houston's unemployment rate had been holding near 4.4 percent for six months but dropped quickly to a 4 percent average from April to June.

Retail and Autos
Both department and discount stores reported soft sales, often running at or below plan. Rainy weather boosted traffic through department stores, enticing consumers into the malls. Furniture stores were off significantly early in the year but had a nice comeback in May and June. Specialty-store sales were even with last year.

A steep drop in May auto and truck sales raised concerns that Houston might be following the deteriorating path set by the national auto market. But June figures snapped back sharply, running 19 percent higher than June of last year.

Real Estate
Existing-home sales were off for the second consecutive month in June, falling 6.9 percent from last year at this time. Slower sales were concentrated in the bottom of the market, where tighter restrictions from subprime lending should matter most. Builders are offering incentives to both real estate agents and consumers. Pending sales expected to close over the next 30 days were also off by 1.5 percent, and the number of properties on the market was up 20 percent over a year ago.

Otherwise, recent trends in real estate continue. Occupancy is flat in apartments, industrial and retail centers, but only apartments are eking out small gains in rent. The office market continues on a streak, with strong gains in both occupancy rates and rents.

Energy Prices
The price for West Texas Intermediate crude oil was $63–$64 per barrel in late May but strengthened steadily to over $70 per barrel by early July. These prices, the highest of the last 10 months, were driven by continued strong global demand, improving domestic demand, and a general strike and violence in Nigeria.

Natural gas markets saw no significant hurricane activity, air-conditioning requirements limited by rain in key areas and inventory still bearish at a steady 18–20 percent above normal. Prices slipped from $7.50–$8 per thousand cubic feet for much of June to near $6.50 in early July.

Refining
Demand for crude in the U.S. was limited by low rates of refinery utilization, which held near 90 percent over the last six weeks. The utilization rate has been restrained by high levels of planned maintenance, a large number of unplanned outages and continuing shortages of labor and skills to deal with maintenance problems. Because of the refinery bottleneck, crude inventory is now well above the five-year average, and gasoline inventory is flat and well under the five-year average. Refiner profits remained high for those units left operating, averaging near $20 per barrel.

Petrochemicals
Petrochemical markets were quiet. Polyvinyl chloride, ethylene and butadiene prices rose, but outages and other capacity issues seemed to play a bigger role than short-term shifts in demand. Demand for many petrochemicals has been sharply boosted by export markets in recent months, and exports continue for these products. Domestic demand is slowly improving.

Oil Services and Machinery
The story in oil services and equipment is not much change. Domestic drilling remains at high levels with little growth, and international work continues to drive most of the market's growth. The slower expansion of drilling activity means that items such as rigs, drill pipe and durable equipment are seeing capacity rapidly catch up with demand, limiting new orders and easing pricing pressure. Items used up in the drilling process remain in strong demand, and lead times for these consumables remain long and more difficult to manage.