October 2009

Economic recovery seems to be taking root more slowly in Houston than in the U.S. Both establishment employment and industrial production are good coincident indicators, but neither one is telling a strong story for Houston. Annualized job growth has hovered between –3 and –4 percent for six months, and the Houston Purchasing Managers Index continues to show no growth in local production. Sales just turned up, perhaps pointing to production gains ahead. Meanwhile, the U.S. is making solid improvements on both measures.

Retail and Auto Sales
Houston retailers continue to report disappointing results, with sales continuing to lag expectations. Last September local retail sales peaked with Hurricane Ike, but there has been no significant recovery since the storm. Discounters and food stores are doing better than most, and consumers continue to focus on less-expensive private-label goods. There is growing concern about the holiday season.

Houston’s auto sales for August jumped 40 percent above recent trends in response to cash-for-clunker incentives, closely matching national gains. Past incentive programs have typically given back about three-fourths of these quick gains over the following three months, and September sales fell back in a predictable pattern.

Real Estate
Home sales were slowed for several weeks last September by Hurricane Ike, and 12-month gains this year were predictably positive. But new home sales have been stabilizing all summer, and inventories for both new and existing homes continued a pattern of healthy decline. Tax incentives and growing confidence in the economy seem to be having a positive effect.

There is no good news from commercial real estate. Occupancy declined across the board in apartments, office, retail and industrial. Rents declined in all sectors except retail, which has remained flat in recent months.

Energy Prices and Refining
Light sweet crude prices stayed in a range of $65–$75 per barrel, with price changes alternately driven by poor market fundamentals, improving economic news or fluctuations in the dollar. Crude oil and gasoline inventories were near the top of their five-year range, while distillates (heating oil and diesel) were 25 percent above the five-year range—and rising. This is a concern because heating oil should be the strongest product heading into winter.

Demand for oil products is higher than last summer, but still below the levels of a year ago. Refiners are operating at utilization rates of 84 to 87 percent, typical of the rates seen over the summer. Reduced output is a reaction to poor margins and high product inventories. Capital projects and even routine maintenance are being deferred to conserve capital.

Petrochemicals
Domestic demand is weak for polyvinyl chloride, a product used extensively for pipe, siding, window frames and other construction products—a market that remains very weak. Export demand, in contrast, is extremely strong, based on cost advantages yielded by low natural gas prices relative to oil. Ethylene and polyethylene enjoy similar cost advantages and are exporting at record levels. Products that sell into general manufacturing (caustic and polymers) or into consumer markets (polyethylene packaging) are seeing improved domestic demand, but generally not enough to really tighten markets—even with help from exports.

Oil Services and Machinery
The U.S. rig count rose again in September and early October, adding about 25 rigs during the period. Oil continues to account for the majority of the new rigs, just as it has since the rig count turned up in July. Since the bottom, just over 100 rigs have returned to work, out of over 1,000 lost to the decline. Extensive available capacity in the domestic industry persists, job losses continue and pricing remains weak. A number of producers have kept drilling based on prices locked in at higher levels by hedging programs, but as these contracts roll over, there is potential for gas-directed drilling to fall further. Many international contracts, negotiated at the peak of drilling activity, are now rolling over, and lower prices are putting more pressure on company profits.