October 2007

Some of the air appears to be coming out of the recent boom in Houston. The reported August slowdown in local employment was probably exaggerated by questionable figures from school districts, but the 2 percent annualized growth rate in the number of jobs outside government better matches the results of recent months. The unemployment rate has stabilized at a healthy 4 percent, and local purchasing managers remain optimistic. Houston's numbers look great compared with a sluggish U.S. economy but are well short of the year-ago results.

Retail Sales
Retailers reported continued solid results. Furniture and home furnishings sales are up 3 percent year-to-date but clearly softened in September. In contrast, local department store sales, up a similar 3 percent for the year, were up over 4 percent in September. One discount store reports that Texas is its top-performing state, quite close to plan, but worries persist about gasoline prices, the stock market and consumer sentiment.

Real Estate
The Houston apartment market continues to absorb units at a steady pace, but occupancy rates remain under pressure because of 17,000 units under construction; the return of would-be homebuyers to the rental market should help apartment absorption. The occupancy story is similar for retail, with big gains in absorption quickly matched by huge amounts of new construction throughout the city.

Although a new downtown office building has grabbed the headlines, office construction is active throughout the city. At least 20 projects—several with multiple buildings—can be counted in west Houston, for example.

Refining
Refinery utilization held at rates over 90 percent, except for the period following Hurricane Humberto, when precautionary closures and power outages pushed down utilization to the mid-80s. Gasoline inventories were well below normal ranges and falling seasonally, while distillate stocks (heating oil and diesel) were growing and near the top of their five-year range. Refiner margins picked up from July weakness and moved back to very profitable levels of over $15 per barrel.

Commodity Chemicals and Plastics
Domestic demand remained weak, but strong export activity filled the gap. The U.S. makes many commodity chemicals and plastics from natural gas, while the rest of the world relies more heavily on oil. Rising oil prices and soft natural gas prices have given U.S. producers of ethylene, polyethylene, polypropylene and polyvinyl chloride cost advantages all year. Steady price increases for these products in recent months were eroding export opportunities, but the latest surge in oil prices, combined with soft gas prices and a weaker dollar, has reopened foreign markets.

Domestic manufacturers of products depending on oil-related inputs, such as benzene, have been forced to raise prices because of the higher feedstock costs. Nylon, styrene and polycarbonate are examples of such products.

Oil Services and Machinery
Oil and natural gas prices moved in opposite directions in recent weeks. Crude oil strengthened to record levels of over $80 per barrel, while weak fundamentals for natural gas kept its price under $7 per thousand cubic feet. The slumping natural gas prices (and the potential for even weaker prices ahead) led some producers to announce pullbacks in domestic drilling for unconventional gas. In contrast, opportunity for international work continues to expand, with at least three billion-dollar projects on the immediate horizon.