February 2008

Is Houston feeling the strain of the U.S. slowdown? It is not apparent yet in the employment data, but the clearest effect is spillover from the U.S. housing downturn. Both the number of single-family permits and existing home sales are down sharply, and foreclosures are rising. Meanwhile, the Houston Purchasing Managers’ Index has slipped from levels indicating strong expansion last fall to modest expansion today. Events in the global economy continue to strongly push up oil prices and support drilling activity, as well as chemical exports, but domestic sales of chemicals and gasoline have weakened. Short of a quick turnaround in the U.S. economy, slower job growth seems likely in coming months.  

Retail and Auto Sales
Local retailers report that 2008 has been a disappointment so far, with all categories except food stores and a few discounters reporting sales running well below expectations. Given the housing slowdown, it is perhaps no surprise that furniture, appliances and electronics have slowed, but many other categories were also affected. Interest in hiring at all levels has shriveled along with sales.

January auto sales were down only 1.4 percent from the year-earlier total. Trucks and SUVs continue to lead the way.

Real Estate
The bottom rungs of the Houston housing market continue to lag, with overall permits for new single-family construction down 27 percent from January 2007, and existing homes sales down 14 percent. The bust in the subprime market and loss of those potential customers triggered the local slowdown last summer, and year-to-date foreclosures were up 16 percent in the first two month of 2008 compared with last year.

Meanwhile, the value of new nonresidential building permits in the city of Houston ended 2007 up 27 percent for the year. Strong job growth has continued to underpin rents and construction levels for office, apartment, retail and industrial markets.

Energy Prices and Refining
Light crude prices were near $95 per barrel in early January, fell as low as $87 per barrel in early February on fears of a weak U.S. economy, but rebounded to $100 per barrel late in the month led by strong global demand and expected OPEC production cuts. Heating oil prices fell with crude oil prices but were cushioned by low inventories and very cold weather in key markets. Gasoline prices were seasonally weak, but they began a sharp increase in late February, as winter nears an end and crude prices climb.

Domestic crude inventories rose throughout the period, as refiners cut production in the face of weak margins and high gasoline inventories. Utilization rates for refineries fell a very sharp 7 percent, as gasoline inventories rose sharply in California and on the East Coast. Margins fell to $7 to $9 per barrel from $12 last fall.

Natural gas prices strengthened in February and rose by over $1 per thousand cubic feet after early January. High inventories of natural gas were pulled down well below year-ago levels by cold weather in key heating markets, but they remain above the five-year average.

Petrochemicals
The story for base chemicals and plastics reflects the pullback in the massive exports that materialized last fall. Domestic demand remains weak, and exports have not been sufficient to clear the market. Polyethylene prices and margins have remained stable but have required production cuts. Polypropylene producers have seen production cuts, falling prices and squeezed margins. Although chlor-alkali producers face weak demand for chlorine due to the sagging construction and PVC pipe markets, they see strong demand and record prices for co-product caustic soda. Caustic soda continues to ride the global commodity boom, supplying strong pulp and alumina markets around the world.

Oil Services and Machinery
The oil services and machinery industry finds itself in much the same situation as late last year.  Domestic drilling is flat, Canadian drilling is down and drilling outside North America remains the chief driver of sales and revenue growth. Rigs and drill pipe have been priced competitively for 12-18 months, but drilling and evaluation services have seen pricing level out in recent months, and the market is now more competitive. Land drilling was flat in Texas and down by a dozen rigs in Louisiana.