October 2008

Houston’s economic growth has slowed by half this year, measured either by payroll employment or the Dallas Fed’s broader measure of coincident economic activity. The unemployment rate is clearly trending up, rising from 4 percent this spring to 5.1 percent in September. The latest official data do not include the effects of Hurricane Ike, due to the timing of job surveys. The data also do not reflect the serious October turn in financial conditions or rapid drop in energy prices.

Retail and Auto Sales
The hurricane and resulting power outages disrupted retail significantly in September, but retailers' concerns focused on weak sales before and after the storm, which left them well behind plan. Concerns were mounting about the coming holiday season, with few prospects that consumers would extend themselves far beyond family-related basics.

Auto sales in the 10-county metropolitan statistical area were off 41 percent in September, compared with a year-to-date decline of only 12 percent. A double hit came from Hurricane Ike and the credit crunch, which quickly narrowed financing options for many dealers and their customers. Credit conditions and slowing income growth were expected to hurt sales significantly going forward.

Real Estate
Hurricane Ike and the credit crunch also hit the housing market hard, with existing home sales down 29.5 percent over 12 months and new home sales off by more than 50 percent. These factors worsened the autumn seasonal slowdown, and the prospects for a rebound were difficult to predict.

The Houston office market is seeing new, leased-up product coming on line, leaving old product with unoccupied space. The result has been a strong overall absorption of space, but a rise in the vacancy rate. The apartment market continues to see solid demand growth, driven by continued local job growth and by tighter credit standards that keep renters from becoming homeowners. Apartment occupancy continues to decline, however, affected by the pace of new construction. The retail real estate market is struggling as chains cut stores or close and new tenants become hard to find.

Energy Prices and Refining
The price of light, sweet crude steadily declined after mid-August, from $115 per barrel to near $100 in early October. It has since plummeted under $70. Weaker growth, a stronger dollar and deteriorating financial conditions all contributed to the decline. Natural gas prices also fell, first to $7.50 per thousand cubic feet by early October and then by another dollar as the month advanced. Energy markets were disrupted significantly by Hurricane Ike, gasoline inventories fell to very low levels and spot shortages were common, but weak fundamentals quickly took hold again because damage to energy infrastructure was limited.

Refiners reduced runs or shut down during the storms, and capacity utilization fell as low as 67 percent. Slumping demand continued to push gasoline prices down after the storms passed, and refiners’ margins remain under significant pressure.

Petrochemicals
Damage was light enough from Hurricane Ike that producers and buyers of petrochemicals seemed to look right through the storm to prevailing economic fundamentals—falling energy feedstock prices, weak demand and ample inventories. Petrochemical markets seemed to be anticipating weak demand through the rest of 2008 and into 2009 as housing, autos and the export market all turned soft in recent weeks.

Drilling and Oil Services
Drilling in the U.S. rose sharply through September and into early October, led by land-based drilling for unconventional natural gas. The number of working rigs in September averaged over 2,000 for the first full month since 1985 but began to fall back in October along with energy prices.

As oil prices fell under $70 and natural gas prices under $6.50, producers began to announce cuts in drilling budgets. So far, the focus is on unconventional gas—such as the Barnett Shale—and land-based drilling is absorbing the bulk of the cuts. Domestic and international oil-directed drilling continues at a strong pace, with few cuts announced. However, the recent reduction in domestic drilling probably spells the end of oil-related hiring in Houston until financial and economic conditions improve.