February 2009

Recent revisions to Houston employment data show a 12-month change in job growth since January 2008 of only 0.7 percent, with jobs shrinking over the past six months at a seasonally adjusted 1.1 percent annual rate. Houston's growth advantage over the rest of the nation during the past five years—oil and natural gas—has not only evaporated in the face of a global commodity bust but has turned into a definite liability. The coming year will see significant job losses in Houston, led by the energy sector.

Retail and Autos
Houston-area retailers reported some relief from the declines and consumer pullback of late last year, although sales remained weak. Discounters performed better but shared the pain. Home furnishings remained surprisingly strong, probably with help from Hurricane Ike insurance settlements.

January auto sales were off 31 percent over 12 months, a figure that looks good only in comparison with a nearly 40 percent national decline. No major brand has been spared in recent months.

Real Estate
Houston housing missed the boom and bust in prices that hit many other parts of the country. But it was hurt by the dramatic 2007 tightening of credit standards after the subprime mortgage market blew up and will be hurt further as job and income growth slide. Over the 12 months through January, local existing-home sales were down 26.4 percent and their median price was down 8.5 percent. Permits for new homes are off 34 percent over 12 months, but the price of new homes permitted is up 8 percent.

The softer economy raises questions for apartment, office and retail properties. A large number of new apartments are in the pipeline, the office market will face white-collar energy layoffs in 2009, and retailers will be under tremendous pressure during a period of consumer retrenchment.

Oil and Natural Gas
The price of West Texas Intermediate crude has fluctuated between $34 and $48 per barrel since early January. Conflict between Israel and Hamas and Russia and the Ukraine plus cold weather and OPEC production cuts worked to boost prices, but the weak economy repeatedly trumped all. A massive buildup in U.S. crude inventories pushed their levels far outside historical ranges.

Natural gas prices were held in place much of the winter by very cold weather in key Chicago and East Coast markets. But as weather has moderated and winter ends, prices have fallen by more than $1 per thousand cubic feet to near $4, the lowest level in over six years. Rising domestic production, Canadian imports and very weak industrial demand combined to pull prices down in the absence of frigid temperatures.

Refining and Petrochemicals
Refiners have seen their margins slowly improve in recent weeks from very poor levels in December, and the last few weeks have been quite good. Operating rates, however, were relatively weak throughout the period.

The price of petrochemicals has continued to fall. A wide variety of resins and plastics experienced significant, rapid price declines in January and February. The slide downward was greased by falling energy feedstock prices, but rapidly shrinking demand has provided momentum and the speed of adjustment. January saw some demand improvement, as customers' inventories had been largely exhausted, and they began to reorder. However, customer orders were described as well outside any historical pattern and only on an as-needed basis.

Oil Services
The domestic rig count has followed the price of oil and natural gas down. The rig count peaked at 2,031 in September, was 1,721 at year-end and is now at 1,170. The decline has been unprecedented in terms of the number of rigs lost. Texas has been a major part of the slide, accounting for 58 percent of the fall in the U.S. rig count since year-end. Production of goods consumed in the drilling process is falling along with the rig count, but demand for durable goods (pumps, drill pipe, bits) can be down as much as 90 percent, as parts are cannibalized from rigs not in service. Layoffs are widespread.