November 2007

The pattern continues in Houston of reported data indicating slowing employment growth and trailing data being revised up sharply. Revised and rebenchmarked data in February 2008 could show 2007 job growth near 4 percent, or 100,000 new jobs. Houston’s unemployment rate slipped back under 4 percent in October.

Retail and Auto Sales
Retail sales turned sluggish in recent weeks, primarily due to unseasonably warm weather that left winter clothes on retailers’ shelves. Department stores fared worst, followed by discounters that rely heavily on clothing sales. High-end sales never slowed, even for department stores. Retailers expressed concerns about entering the holidays with heavy inventory and the possible need to jump-start sales with early discounts.

Auto sales for the first nine months of 2007 were up 4 percent, and September sales in Houston were up a strong 11 percent. This contrasts with a weak year for auto sales nationally.

Real Estate
Houston never experienced the excessive price appreciation that marked the national housing downturn’s early stages. But not even surging job growth has held off the loss of subprime and other high-interest rate lending. Existing-home sales fell 8.6 percent in October compared with October 2006, after a September tumble of 16.7 percent. New home sales were off 41 percent in September, with traffic off 18 percent. Builders have reacted quickly, and new home inventories are now below last year’s levels.

The city of Houston reports commercial permits up 25 percent through October. Strong job growth—especially in professional and technical ranks—continues to drive demand for apartments and office space. Over 5,000 apartment units have been completed in 2007, and another 20,000 are in the pipeline.

Energy Prices and Refining
Energy prices have risen since early October, led by sharp increases in the price of crude oil. Light, sweet crude prices have pushed up from $80 per barrel to over $90 in recent weeks, with the increase based on tight fundamentals, geopolitics and a weak dollar. Both heating oil and gasoline prices followed crude up, rising by 40–50 cents per gallon at the wholesale level.

Refiners were reluctant to build crude inventories with current prices well above futures. In addition, the need for inventories was diminished by the move into the fall maintenance season and reduced refinery runs. The spike in crude prices put refinery margins under pressure; the October average has fallen by about $3 per barrel on the Gulf Coast since September.

Oil Services and Machinery
The U.S. rig count fell by about 20 rigs in recent weeks, although Texas drilling rose to the highest levels since the 1980s. Louisiana drilling picked up as well. Drilling firmed along with natural gas prices, as higher crude prices pressured natural gas prices upward despite record high and still rising gas inventories.

Day rates for rigs are under downward pressure in a no-growth environment. Land rigs are seeing competition from new builds, from Canadian rigs moving south and even from some Chinese imports. The number of offshore rigs working the shallow Gulf of Mexico was curtailed in the third quarter because of tropical weather, and some have not returned to service. The market for other durable equipment (such as drill pipe) is also weak, with sluggish demand and poor pricing. The price of services has generally flattened.

Petrochemicals
Domestic petrochemical demand has been slack in recent months, hurt by the poor auto and housing markets. Healthy demand from abroad, a weak dollar and favorable feedstock prices had allowed exports to fill the gap, however, leaving the overall market surprisingly strong. Recent weeks have seen planned and unplanned outages in the ethylene and propylene markets drive the price of these base chemicals up sharply, taking the price of plastic with it. The result of these higher prices has been that export opportunities have increasingly dried up.

Higher feedstock prices were the main factor driving up the price of ethylene, propylene, polyethylene, polypropylene, polyvinyl chloride and bottle resin; prices are down for chlorine and polystyrene due to weak demand.