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Houston Economic Update

April 2010

Growth in the Houston economy is indicated by an expanding list of key measures, but an important point was passed in March with a second consecutive month of local job growth. The 7,000 new payroll jobs represent a small step toward restoring the 112,000 lost since the employment peak in August 2008 but a continued trend toward locking in local economic recovery. The seasonally adjusted unemployment rate remains high at 8.7 percent and has been range-bound since last October.

Retail and Auto Sales
Retailers laid claim to a very good Easter season, even allowing for the expected seasonal boost. More impressive was that the improved retail picture was shared across a wide variety of retailers, including specialty shops, discount stores and full-service department stores.

Autos sales in Houston followed national trends with very strong gains in March. Local sales were up 26 percent based over 12 months, while national sales rose 21 percent. Incentives have played a growing role in auto sales in recent months.

Real Estate
The usual winter sales slowdown plus worse-than-normal weather in Houston combined to pull February sales of existing homes down by 4 percent relative to a year ago. In contrast, new home sales made small gains, and builders are putting new speculative homes on the ground in anticipation of a sales boost driven by the coming expiration of tax credits for first-time homebuyers.

Commercial real estate is always a lagging indicator, and—at best—the outlook is slightly less gloomy for apartments, offices, warehouses and retail space. Key economic fundamentals that support the sector are improving, as industrial production, employment and retail sales are making gains. The momentum in the economy needs to be sustained, however, to mop up excess capacity and bring a market bottom into clear focus.

Oil Products and Refining
The demand for oil products is still weak, with consumption 6 percent below the peak in March 2008. Gasoline demand is rising seasonally, and while inventories are falling in a typical seasonal pattern, they remain well above normal levels. Inventories of distillates (diesel and heating oil) are more than 15 percent above normal, even after the severe cold of this past winter. Product prices have largely followed the rising price of crude oil. On-highway prices of gasoline and diesel rose by about 20 cents per gallon. Refinery margins remain weak. Even before the spring maintenance period began for refineries, capacity utilization was below 80 percent.

Prices rose sharply for a wide range of basic chemical and plastic products, including ethylene, polyethylene, polyvinyl chloride, polypropylene, polystyrene, chlorine and caustic soda. While respondents reported moderate increases in demand for many products, the dominant factor driving the price increases was supply disruptions. Numerous plant outages in ethylene, for example, began in January and have continued to leave as much as 15 percent of domestic capacity out of commission. The outages began with processor inventories quite low, and production shortages quickly drove large price increases. Rising oil prices also pushed up prices for products such as styrene and polystyrene.

Oil Service and Machinery
Rising oil prices have kept international drilling strong and rising. The U.S. rig count also continues to grow rapidly, increasing by 98 rigs over six weeks. Gains in U.S. drilling are driven in part by high oil prices, with more than a third of U.S. drilling now directed to oil. Natural gas prices are weak, but gas-directed drilling continues to rise based on several factors: high prices locked in over the winter, the need to avoid leaving leases idle, and some companies being more interested in learning the new shale-gas technology than in current profits. Service capacity has begun to slowly tighten in selected areas.


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