January 2008

The Houston economy is probably on track to have added 100,000 new jobs in 2007, once all the revisions are complete. The local economy continues to click along, with the one notable exception of housing. Oil prices above $90 per barrel continue to work their magic for the city, despite slower growth at the national level. Looking ahead, however, if the slowdown were to become more serious for the world’s largest economy, it could spell adverse consequences for both oil markets and Houston.

Retail Sales and Autos
Local retail sales during the holidays were disappointing for many stores. Clothing was a major problem, as warm weather kept the stores overstocked through the Thanksgiving weekend. Discounting began even before the holiday shopping got serious and then seemed to snowball. Department and furniture stores were off significantly, discount stores about flat.

Local car and truck sales, in contrast, finished the year strong and were up 2.6 percent for 2007 as a whole.

Real Estate
Sales continue to decline for both new and existing homes. New-home sales are likely to finish the year down by 20 percent or more. Existing-home sales were down only 4 percent through November, with most of the decline at the lower end of the market. The correction process is falling primarily on sales rather than home prices, which have remained steady.

Strong job growth is keeping other real estate markets healthy. Apartments are leasing rapidly, but thousands of units under construction keep both rents and occupancy from significant gains. Retail continues strong throughout the city. The office market remains the star, however, with a good year for occupancy and rent assured in 2008, barring unforeseen and serious economic problems. Energy continues to drive demand for office space, and construction is a couple of years behind the curve.

Energy Prices and Refining
Crude oil prices pushed to near $100 per barrel in early January, driven by OPEC’s decision to maintain current production; by geopolitical issues in Iran, Nigeria and Pakistan; and by a sharp decline in U.S. inventories. Gasoline prices followed crude prices up, and heating oil rose with additional momentum coming from sparse inventories.

Refinery utilization held at about 90 percent, typical for this time of year. Refiner margins were dampened by the rising price of crude inputs and by highway diesel and gasoline prices that lagged well behind crude.

Natural gas prices were under downward pressure from moderate winter weather and inventories that are about 10 percent above normal for midwinter. They were supported, however, by sharply rising oil prices. Natural gas prices remained range-bound between $7 and $8 per thousand cubic feet.

Petrochemicals
Petrochemical demand has eased significantly. Domestic demand continued to weaken in response to poor housing and auto activity, and export demand eased for most products. Caustic soda exports remained strong and ethylene and polyethylene revived some at year-end, but propylene and polypropylene were largely priced out of the export market. After seeing a string of price increases for plastics throughout 2007, pressure on the prices of polyvinyl chloride, polyethylene and polypropylene seemed to ease at year-end.

Oil Services and Machinery
Domestic drilling held steady near 1,800 working rigs, but the Texas rig count jumped sharply, once again led by work in the Barnett shale near Fort Worth. Expectations are for drilling to decline in Canada in 2008 and remain steady or pick up in the U.S. and for lucrative international work to continue to grow. Pricing is mixed depending on the line of business, on domestic weakness versus international strength and on declines in some durable goods versus better pricing for nondurable products consumed in the drilling process. Overall, price pressures in oil services have eased significantly since last spring.