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Houston Economic Update

March 2010

The newly revised data on Houston employment paint a picture of local recession that is little changed from the original estimates. Metro job growth peaked in mid-2009 and has fallen by just over 3 percent—or nearly 90,000 jobs—since mid-2008. However, oil services and manufacturing, which provide many of Houston’s best-paid jobs, declined considerably further than the original estimates. Houston’s labor market is still seeking positive job growth and seems to be trailing the course of U.S. growth by several months. The local unemployment rate has held between 8 and 9 percent for the last six months.

Retail Sales
Texas retail sales—including Houston—continue to lag the solid sales improvements recently experienced across the U.S. Local specialty stores performed best by capitalizing on their particular market niche, discount stores less well, and traditional department stores continue to falter. There is widespread optimism among retailers that spring and summer will bring continued improvement compared with last year.

Auto sales in Houston picked up sharply in January, rising 5.2 percent from a year earlier. Fleet sales were a major contributor to Houston’s January sales improvement, just as they were nationwide.

Real Estate
Local real estate markets continue to struggle and are unlikely to improve before we see the return of significant job growth. Sales of existing single-family homes fell 12.3 percent in January, an apparent payback for several months improved sales that were induced by government incentives. Local commercial real estate saw occupancy peak for all categories between 2004 and 2006, and occupancy has not recovered or has continued to decline as new product is delivered to stagnant markets. Rents are under pressure for every commercial product and all qualities of those products.

Oil Prices and Refining
Crude prices opened 2010 at $82–$83 per barrel, but trended downward to reach $72–$74 per barrel in February. Concern about the global economy dominated the weak price picture. The demand for U.S. oil products remains very weak, down 3 percent from the crisis period of last year, and down 8–9 percent from prerecession levels. Crude and product inventories are all well above normal—especially heating oil and diesel, which were more than 20 percent above the five-year average.

Refining margins continue to be very poor, and refiners responded with further cuts in refinery utilization rates. Rates are below 80 percent, some of the lowest rates of the last 25 years, excluding weather-related shut-ins like hurricanes.

Chemicals and Plastics
Products that depend on natural gas for feedstock or other inputs maintain an edge over those produced from oil, and record levels of exports continue. Prices rose for a wide variety of products. Feedstock costs rose and provided cost pressure for some products, especially those that are oil-related (styrene, polystyrene, nylon). Although natural gas prices rose, the cost pressure from natural gas feed stocks were dwarfed in many cases by a spike in ethylene price—a result of extensive domestic and global plant outages. As many as a dozen U.S. ethylene crackers were down due to the cold weather in the U.S. Outages in Europe and Asia added to the market tightness. Price should return to normal in coming months.

Oil Services and Machinery
Drilling activity in the U.S. continues to rise strongly, and service activity is picking up along with the drilling. Hiring has begun in some key basins. Service costs have not yet begun to increase in this cycle, but capacity is beginning to tighten in selected lines of activity and in some geographic areas. Confidence was expressed that this expansion looks durable through the first half of 2010 as customers have committed to drill to secure leases or learn the new shale technology, or because they have hedged at profitable levels.

 

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