August 2008

As expected, revisions to Houston’s wage and salary employment growth were positive through the first quarter of this year, implying six-month job growth of about 2.2 percent, or a pace of about 55,000 new jobs in 2008.

The revisions were modest—an increase from growth of about 1.8 percent—and still indicated growth slow enough to be consistent with a rise in the local unemployment rate from 4 to 4.6 percent in recent months. New jobs have been dominated by well-paid professional categories such as energy, health care and engineering.

Retail and Auto Sales
Discount stores report that sales remain on track in 2008, but most other retail categories have seen their markets soften significantly in recent weeks. Department stores saw sales slow sharply in August, and furniture stores were squeezed by the housing downturn. Many independents are suddenly struggling. Even the annual tax-free weekend had less impact than normal. One of the few areas of strength was food, even after adjusting sales for inflation. Respondents speculated that high gasoline prices and crimped budgets are keeping people close to home.

Houston’s auto and truck sales have followed the trend of broad weakness in national auto markets, down 12 percent in July and 6 percent year to date. In recent months, truck and SUV sales have made up less than 50 percent of Houston vehicle sales for the first time in over a decade.

Real Estate
Existing-home sales have been below year-earlier levels for each of the last 12 months, largely in response to tighter credit standards. Year-to-date sales of existing homes through July are down 14 percent for the metro area. In the city of Houston, the value of new residential permits is off 24 percent over the same period.

Houston’s office and industrial markets took a breather, as months of improvement in vacancy rates leveled off over the summer. Supply and demand seem well-balanced in both markets, however. Apartments and retail centers look less well-balanced, with rising vacancy rates and significant product in the pipeline.

Energy Prices and Refining
Light sweet crude oil passed $145 per barrel in early July, then turned and fell back to $115 per barrel, the lowest level since May. The decline was attributed to a stronger dollar, a soft U.S. and global economy, and easing international tension in Nigeria and Iran. At the same time, the price of natural gas fell from $13.50 per thousand cubic feet to below $8, the lowest level since February. Falling oil prices and data showing a 5 percent increase in year-over-year domestic production pulled gas prices down.

Demand for gasoline was weak, down about 1.3 percent year over year, and demand for all oil products was down about 2 percent. Refiners steadily cut production, from capacity utilization rates of 89 to less than 87 percent. The decline in product prices was faster than that for crude, leaving refining margins down sharply, cut by half on the Gulf Coast between June and July, for example.

Oil Services and Machinery
The Baker Hughes domestic rig count continues to rise rapidly, up 79 rigs over the last six weeks. New Mexico has been flat, Texas added 14 rigs and Louisiana added nine. All the additional drilling in Texas and Louisiana is land-based, led by horizontal drilling in the Barnett and Haynesville shale. There is no indication of cuts in drilling activity now or in the announced intentions of producers. Current prices remain profitable, but further declines could endanger the profitability of unconventional gas drilling in selected areas.

Petrochemicals and Plastics
Prices of energy feedstock for petrochemicals—natural gas liquids and naphtha— fell along with energy prices. Ethylene prices declined throughout the period, following feedstock costs downward. Polypropylene broke a four-month period of relentless price increases, as lower energy prices finally made the difference. Downstream plastics prices generally did not fall. There were some spot price declines, but contract prices held steady. Processors generally felt that they remained behind the curve in passing through past energy price increases, while their customers stringently opposed additional price hikes.