June 2009

The Houston economy peaked last November, beginning its decline as oil prices fell back under $100 per barrel and the U.S. economy fell into a serious financial crisis. Over the past six months, local employment has fallen at a 3.7 percent annual rate, while the unemployment rate has jumped from 5.5 to 7.2 percent. The most recent data show few signs that the rate of decline in the local economy is slowing.

Retail and Auto Sales
Guarded optimism marked conversations with local retailers. One department store that tracks selected products and customers as leading indicators saw possible improvement in the months ahead. This same store also beat its (admittedly downbeat) plan for May. Furniture is doing well on continued insurance payments generated by Hurricane Ike and the closure of a major competitor. Grocery stores benefit and local restaurants lose from consumers continuing to eat at home more frequently.

Sales of new cars and trucks in the Houston metro area increased 5 percent from April to May, marking a third consecutive month of improved sales. Sales are still down 29 percent from a year earlier.

Local Real Estate
The local housing market continues to decline, with April sales of existing homes off 24 percent on a 12-month basis, and permits for new home construction off 47 permits. What sets Houston apart from many other U.S. housing markets is price stability, with existing home prices off less than 1 percent over the past year. Like other areas, however, Houston has seen credit tighten dramatically and the local economy turn sharply downward.

Apartment occupancy edged down, as the local market tries to digest a large number of new communities, while rents have remained flat for 18 months. The cuts in energy, engineering, and other professional jobs continue to put downward pressure on office rents and occupancy. The local retail market is also marked by continued modest declines in rents and occupancy.

Oil Prices and Refining
Light sweet crude prices have risen from $50 to $70 per barrel in recent weeks. Oil markets have been focused on the pace of the U.S. economy, on the strength of the dollar and on inventory levels. Consumption of gasoline is down 2.6 percent from a year ago, and distillates are down more than 15 percent. Distillates are watched as an indicator for economic conditions to the extent that diesel is used as a transportation fuel. Pump prices for gasoline rose by over 40 cents per gallon in recent weeks, while diesel prices rose only 5 cents. Oil product prices collectively have risen by about the same amount as crude, leaving refinery margins unchanged and still relatively weak. Capacity utilization by refineries has stayed in the 82–84 percent range, down about 7 percentage point from a year ago.  

Petrochemicals
For many products, the market is oversupplied, especially in light of current economic conditions. Numerous plants have shut down; new capacity is still coming online; prices are driven largely by feedstock costs; and profit margins are under considerable pressure. The rise in oil prices and fall in natural gas prices have opened a window for exports of ethylene and polypropylene. Most U.S. producers rely on the cheaper natural gas feedstock, while foreign producers rely on oil-based naphtha. For ethylene the huge overhang of capacity—including new plants and restart of five large steam crackers—has kept profit margins under pressure. For polyethylene plastic, however, strong export demand has allowed the market to tighten some (at least, given the continued shutdown of about 30 percent of capacity), and prices rose 3 cents per pound in May.

Oil Services and Machinery
The rig count continues to fall at the fastest pace since the winter of 1985–86. Respondents have generally seen their work fall with the rig count, and revenues have declined even faster as margins have come under pressure. Customers have been ruthless in demanding price concessions that reflect the fall in commodity prices and their own revenues. The extent of the drop in service revenues and of concessions to producers depends on the proprietary nature or technology intensity of the services. Having a large number of customers outside North America also is a plus for revenues. Day rates for land rigs and pressure pumping are examples of hard-hit North American services. Weak natural gas prices are expected to continue over the summer, with some respondents raising the possibility of storage filling before the heating season arrives.