Houston Economic Update, July 2009

Fundamentals are improving for the Houston economy, which seems to be responding to better news. The U.S. recession is apparently drawing to a close, with a wide range of measures pointing to a turnaround in the fall. Oil prices and a variety of other commodity prices have moved up in recent weeks, reacting to massive stimulus purchases out of China and to the approaching U.S. recovery. The U.S. rig count has turned up, chemicals exports have soared for some commodities and local employment was stable in June. The turn in the U.S. economy looks real, but the question for Houston’s near-term economic performance is whether the commodity markets have turned too early. Will Chinese stockpiling today mean weaker demand tomorrow as recovery sets in?

Retail and Auto Sales
Retailers in Houston pointed to a turn for the worse in late June and early July, as sales figures fell well short of their plans. Discounters did the best, but conditions worsened steadily as profit margins increased, with high-end department stores and specialty stores faring the worst. Some respondents felt the Texas heat wave played a role in keeping shoppers at home.

Houston remains an active participant in the ongoing auto bust of 2008–09, with local sales down 40 percent over the first half of 2009 and down nearly 50 percent from last June. For this diminished number of purchases, lower gasoline prices have moved shoppers back to a preference for SUVs and trucks.

Housing and Real Estate
In another sign that Houston is following the national economy’s lead, the local housing markets is responding to lower mortgage rates and first-time buyer incentives. Sales of existing single-family homes are down 15 percent from a year ago (improved from a decline of 23 percent in January), and the median price has ticked up steadily all year as more expensive homes have begun to sell again. New-home sales and permits, in contrast, are still down sharply (both near 40 percent on a 12-month basis) and have yet to turn up. The median sales price has been steady for the last year.

All commercial real estate sectors continue to feel the grip of recession and tight credit conditions. Retail, industrial, office and apartment occupancy is down, as a combination of new construction and reduced demand takes a toll. Office and industrial rents are under the greatest pressure.

Oil Markets and Refining
Light sweet crude spent most of June near $70 per barrel, only to fall back to $60 in early July. The rise to $70 seemed to defy market fundamentals of weak demand and high inventories. Domestic demand for oil products remains weak—gasoline demand is down only 1.4 percent from a year ago, but both distillates and jet fuel are down 15 percent.

Refiners operated at a steady 86 to 87 percent of capacity utilization. Weak demand for oil products made it difficult for refineries to pass through the higher price of crude oil. Profit margins remained at the weak levels of recent months and at only half the level of a year ago. On-highway gasoline prices rose about 10 cents per gallon in June but fell back in July.

Oil Services and Machinery
The total number of rigs working in the U.S. appeared to stabilize in June and rose by about 50 rigs in late June and July. The pattern was seen in both Texas and New Mexico, though not Louisiana. The improvement was driven by rising oil prices. Natural gas prices remained relatively weak, and producers took the opportunity to switch from gas- to oil-directed projects and to expand the number of wells drilled. The oil-directed activity was described as opportunistic, with no pattern in terms of geography or technology. Natural gas-directed activity continued to fall. The excess capacity in the industry remains so large (with activity down by over half from the peak) that a small and possibly transitory pickup in activity was not felt in sales or pricing.

Healthy natural gas markets are needed for a sustained U.S. recovery in drilling, and the outlook for natural gas is so bearish that neither $70 oil nor a serious heat wave in the Middle West and South did much to improve its price. Inventories are expected to be at record levels before fall. The price moved briefly over $4 per thousand cubic feet in June but was again below $3.50 by early July. Production is about 3 percent higher than it was last year, and demand remains weak.

The prices of a variety of chemicals are rising. Ethylene and polyethylene prices are up on increased export demand, and styrene and polypropylene prices have been driven by rising energy prices. PVC is up because of rising ethylene and chlorine costs. Export demand is quite strong due to cost advantages based on the price of natural gas versus oil, with help from strong Asian demand driven by China’s stimulus package. The open question is whether the Chinese stockpiling of commodities at low prices just means less demand as recovery begins in earnest. Domestic demand is generally weak, with products like polyethylene and caustic soda reporting modest month-to-month increases.