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HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • The Houston Business Cycle Since the Oil Bust Using Houston employment as our primary guide, we look at total employment, build a diffusion index based on changes in employment by sector and search out unusual concentrations of local jobs to define local export activity. We also use other economic series to define an index of coincident economic activity. N early 16 years have elapsed since Houston’s oil bust ended in early 1987. Since that time several important events have shaped the local business cycle: the 1990 – 91 U.S. economic recession, the U.S. economic boom of the late 1990s, the Asian financial crisis and the 2001 U.S. recession. Interwoven with these larger events is a related cycle in oil and other commodities that was particularly important to Houston. Since 1987 Houston’s business cycle has been marked by rapid growth interspersed with three distinct periods of no growth or slow growth. The most recent no-growth period began in early 2001 and probably marks the city’s first recession since 1987. The richest and most timely set of data on the Houston economy is 53 series of monthly employment data by industrial sector, and we use employment JANUARY 2003 as our primary guide to economic activity since 1987. In this article we look at total employment, build a diffusion index based on changes in employment by sector and search out unusual concentrations of local jobs to define local export activity. We also use other economic series — real retail sales, real wages and the unemployment rate — to define an index of coincident economic activity. It is this index that points to an ongoing mild recession in Houston that began in early 2001. The 1991–93 Slowdown The U.S. recession of the early 1990s lasted from July 1990 to March 1991, but a prolonged period of weak expansion and limited job growth followed. The jobless recovery was not clearly over until mid1993, when the United States entered an extended period of rapid growth in both output and employment. Even in the early stages of this rapid growth period — in 1993 – 94 — the pattern was set for 3 million new jobs per year and 4 percent annual GDP growth. Figure 1 Working Rigs in the United States, 1988–2002 Number of rigs A Diffusion Index. Another progress in measure of employment strength Houston in 1992 or weakness emphasizes the was the newly 1,200 breadth of change in employelected Clinton ment as opposed to the total administration, 1,000 number of workers with jobs. which advanced The Texas Workforce Commisa series of public 800 sion reports 53 separate empolicy proposals ployment series for Houston that seemed 600 each month, and a diffusion aimed at the index focuses on the number basic pillars of 400 of series increasing versus the Houston ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 those decreasing. Periods of economy. A proSOURCES: Baker Hughes; authors’ calculations. strong growth should see more posed Btu tax sectors increasing, and weak would have more Accompanying the U.S. growth would be accompanied than doubled the tax on oil growth story was an important by a growing number of and natural gas relative to other cycle in oil and natural gas declining sectors. energy forms, a potential blow exploration.1 Two important oil The diffusion index (It ) for to refining and petrochemical shocks preceded the national time period t is calculated as activity along the Ship Channel. recession. Crude oil prices follows: Proposed health care reform, increased 50 percent as the which introduced the term It = 37.75 + (Nt – Dt ) Iran – Iraq war ended in 1989 primary care physician, would and OPEC found renewed diswhere Nt is the number of have struck hard at the specialcipline in world oil markets. seasonally adjusted sectors ized care offered by the Texas Then prices jumped another increasing from one month to Medical Center. Finally, a presi59 percent as Iraq invaded the next, Dt is the number dedential review of the need for a Kuwait in 1990. creasing and 12.25 is the averspace station project froze inLocal oil producers recogage value of Nt – Dt from 1988 vestment in the Clear Lake area. nized the transient nature of to 2002. Thus, the index is set Employment continued to the Gulf War oil spike but saw in such a way that its average grow in Houston through much the increased revenues and value from 1988 to 2002 is 50. of the 1990 – 91 U.S. recession; cash flows as an opportunity If the index is greater than 50, oil revenues carried the local to beef up staff and plant for the economy is performing economy, and job growth did a coming boom in natural above average; if the index is not flatten out until late 1990. gas-directed drilling. Convenbelow 50, economic performEven as the bad news mounted tional wisdom held that the gas ance is subpar. — jobless recovery in the United bubble — the surplus of natural States, a collapse gas generated by energy deregin drilling and ulation in the late 1980s — was the Clinton proFigure 2 Total Employment in Houston, 1988–2002 finally at an end and that gas posals — job Thousands of jobs prices would soon rise sharply. growth did not However, this expectation was decline; it re2,400 denied by a warm winter in mained flat 2,200 1990 – 91, when natural gas through all of prices plunged to near $1 per 1991 and much 2,000 thousand cubic feet. Domestic of 1992. Figure 2 drilling collapsed along with clearly shows 1,800 gas prices, sending the number this period, in of working rigs to the lowest which the number 1,600 levels in the 50-year history of of jobs neither the Baker Hughes rig count grew nor de1,400 (Figure 1 ). clined signifi1,200 Further blocking economic cantly. 1,400 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 SOURCES: Texas Workforce Commission; authors’ calculations. 2 Table 1 Location Quotients and Sector Share of Basic Employment in Houston, 2001 Figure 3 plots a centered seven-month moving average of the index. It indicates the same general periods of belowaverage performance as total employment, with values below 50 during 1991– 93, 1998 – 99 and the current slowdown. During the 1991– 93 slowdown, the index peaked in April 1990 at 61.3 and hit its low point in October 1991 at 39.6. Diffusion indexes often play the role of leading indicators, and this index played that role well by turning before both the slowing and the reacceleration of job growth. Although total employment began to grow slowly in late 1992, this diffusion index points up the slowness of overall growth, indicating that the breadth of job growth across sectors remained below average through March 1995. It took strong U.S. economic growth, which began in mid-1993, combined with a 1995 turnaround in oil and natural gas extraction to get Houston’s employment growth back on the fast track. Defining Houston’s Export Base. Another simple measure of economic activity, also based on employment data, is the export base of a locality. The calculation begins with the concept of excess employment and the identification of unusual concentrations of workers in the local economy. Such concentrations may indicate export activity. Table 1, for example, shows the location quotients for a series of key sectors in Houston. percent share of total employment found in industry i in Houston LQ i = percent share of total employment found in industry i in the United States If Houston is a typical place in the United States, its location quotient is equal to 1; if it has a higher than normal con- Sector Oil producers Oil services Special trade contractors Other construction Manufacturing Electricity, gas, sanitary services Durable wholesale Personal services Business services Auto repair Legal services Engineering, management services Location quotient 9.28 6.54 1.21 1.97 .76 2.38 1.31 1.09 1.18 1.13 1.17 1.6 Percent basic 100 100 17.4 49.2 100 26.2 23.8 8.6 15.1 11.5 14.2 37.5 NOTE: Oil producers, oil services and manufacturing sectors are 100 percent basic by assumption; other sectors follow formula in text. SOURCE: Authors’ calculations. centration, the location quotient measure of Houston’s tradiis greater than 1; and if it has a tional economic base, one below average concentration, could question whether the the location quotient is less measure has kept up with job than 1. diversification trends in HousA location quotient greater ton, especially in the service than 1 can be interpreted as sector. Maybe the best way to indicating potential specializainterpret these calculations is tion in production and export as a timely measure of how activity from the community to Houston’s traditional strengths the rest of the nation and the in oil, chemicals, engineering world. In Table 1, it is assumed and heavy construction are that 100 percent of oil producperforming. Again, focusing on ers, oil services and manufacthe 1992 – 93 period, Figure 4 turing is export-oriented. For clearly shows the serious disother sectors with a location tress felt by oil production, quotient greater than 1, the drilling and related manufacturexcess share of employment — ing as the price of natural gas the share above what would collapsed. normally be found in the comWhat kept total employment munity— is calculated as perflat in Houston from 1991 to cent export jobs in sector i = 1993, with so much downward pressure on basic exports from (LQi – 1)/LQi × 100. Using these definitions, Figure 4 plots Figure 3 Diffusion Index for Houston Employment Houston’s export Index, 7-month average base from 1988 to 2002. Oil pro65 ducers, oil serv60 ices, durable manufacturing, 55 pipelines, heavy construction and 50 engineering services still dominate 45 the industries highlighted in 40 Table 1. While it 35 remains a good ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 SOURCES: Texas Workforce Commission; authors’ calculations. 3 Figure 4 Export Base in Houston, 1988–2002 Thousands of jobs 550 525 500 475 450 425 400 375 350 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 SOURCE: Authors’ calculations. the oil sector? Basic exports are important because they pay for imports; Houston trades oil services for financial services from New York, autos from Detroit and software from Silicon Valley. Exports also support inherently local, nonexport activities such as dry cleaners, video rental stores, grocery stores, drugstores and neighborhood restaurants. After a solid recovery and expansion following the oil bust (total employment grew 3.4 percent per year from January 1987 to January 1992), nonexport activities also grew rapidly, lagging the basic industries and trying to catch up with the earlier rapid export growth. This continued momentum from nonbasic growth, plus additional help from the U.S. economy after 1991, provided just enough strength to keep job growth out of a significant decline in 1992 – 93. The 1998–99 Slowdown During 1996 and 1997, Houston’s economy hit on all cylinders and ran at peak capacity.2 The national economy was booming, along with drilling activity and oil services, and there was strong capital spending downstream by refiners and petrochemical companies. By early 1998, however, storm warnings were being issued for all the economies up and down the Gulf Coast.3 The Asian financial crisis began in ’00 ’01 ’02 Thailand in May 1997 and quickly spread to Malaysia, Indonesia, the Philippines and South Korea. The roots of the crisis lay in too much capital seeking too few deals in the fastest growing part of the world, a loss of confidence in these countries’ banking systems and a collapse of local currencies as foreign capital fled the region. Eventually, countries throughout Asia, Latin America and Eastern Europe felt the destabilizing effects of the crisis, and the world saw the worst collapse of commodity prices — for cotton, soybeans, copper, gold and especially oil — since the Great Depression. Oil markets in 1998 were already headed for a difficult year. A warm winter and spring, ongoing humanitarian sales of Iraqi crude oil, and OPEC’s decision to increase quotas and ratify cheating by its members all added crude oil to world markets. Then the Asian crisis added another 400,000 barrels per day, and the price collapsed to $10 – $12 per barrel at midyear. Cheap Middle Eastern chemicals that would have been sold to Asia were diverted to Europe and other U.S. export markets. Planned engineering and industrial construction projects were canceled around the globe. 4 Crude oil prices fell to $12 per barrel in June 1998, and domestic drilling followed to a seasonally adjusted 525 rigs in April 1999, yet another all-time low. Foreign drilling was similarly depressed. Oil prices did not improve until OPEC and several non-OPEC producers forged an agreement in March 1999 to remove 2 million barrels of crude from world markets. By May 1999, West Texas Intermediate had improved from $12 to $19 per barrel, and natural gas had risen from $1.64 to $2.20 per thousand cubic feet. Throughout the crisis, U.S. growth was shaped by two conflicting trends. One was the slowdown in world growth and the collapse of commodity prices. The other was a sharp decline in short- and long-term interest rates, as the 30-year bond fell from 6.5 percent in July 1997 to dip briefly under 5 percent in October 1998. Lower rates, rising incomes and stock market gains fueled demand for autos, housing and durable goods. By the second half of 1998, the United States seemed to have shrugged off any global problems and returned to its fast-growth track of the late 1990s. The mix of good news and bad — depressed commodity markets versus strong U.S. growth — shows up clearly in our charts for the 1998 –1999 period. Each shows a different part of the story. Figure 2 shows no prolonged decline in employment, for example, as job growth simply flattens out for the first six months of 1999. In contrast, Figure 3 shows a prolonged period of weakness. The breadth of employment growth peaks in December 1997 at 61.3 and falls under Figure 5 Growth Rate of Basic and Nonbasic Employment in Houston, 1999–2000 50 in July 1998. It would not be until April 2000 that the diffusion index would move above 50 and stay there. With both commodity markets and the U.S. economy struggling, fewer and fewer local sectors were left growing. The depth of the problems in oil and other commodity markets is best illustrated by the number of jobs in Houston’s export base (Figure 4 ). Basic export employment fell 4.9 percent between December 1998 and October 1999. The peak in base employment came late —18 months after the Asian financial crisis began and 10 months after domestic drilling peaked. How did Houston avoid losing jobs in 1998 – 99? The answer again lies in a combination of strong continued U.S. growth and past momentum. Figure 5 contrasts the behavior of basic and nonbasic Houston employment, measured monthly by average annual growth rates. The rapid growth in 1996 – 98 created a need for continued growth in local businesses such as dry cleaners and retail stores, local construction, housing and such, providing momentum that carried over into 1998 – 99 even as Houston’s traditional export base was collapsing. The result was nonbasic employment growth that stayed well above 2 percent annually, while oil and chemical jobs collapsed. The Current Slowdown The primary force affecting the U.S. economy since early 2001 has been the recession and the jobless recovery.4 Rapid U.S. expansion ended in 2000 as rising interest rates began to choke off housing, auto and consumer durable sales and as 3-month average (percent)* investment in the 8 New Economy 6 collapsed along Nonbasic export jobs with computers, 4 semiconductors, 2 telecommunica0 tions and the –2 Internet. The –4 recession was –6 mild and brief, Basic export jobs –8 beginning in –10 March 2001 and –12 probably ending 1999 2000 the following * Annualized rate. November. ModSOURCES: Texas Workforce Commission; authors’ calculations. erate rates of recovery, continued weakness in the New EconApril 2001 and fell by 39.8 peromy, and concerns about war cent to 771 by the following and terrorism have combined to March. The rig count climbed prevent any significant job to 850 by May and stayed near growth in either Houston or the that level through the rest of United States in 2002. 2002. Driven by oil instead of Crude oil and natural gas natural gas, international prices have been surprisingly drilling never collapsed like strong since 2000. Oil prices domestic exploration and has moved over $30 per barrel in remained relatively healthy. Oil the spring of 2000 on the heels field conditions have not been of an agreement among OPEC nearly as bad as in previous oil and non-OPEC producers, cycles of the 1990s, but oil including Russia, Norway and service companies are frusMexico. A target band of trated that energy prices have $22 – $28 was set for a basket been so high and drilling activof OPEC crude oils, and OPEC ity so weak. Producers seem to discipline has since kept crude have focused more intently on prices mostly within the price the fundamentals of recession, band. Natural gas prices have warm weather and high invenalso provided positive surtories than on price alone. prises, generally staying above Total employment in Hous$2 per thousand cubic feet ton peaked at 2,125,000 jobs since 1996. Despite warm winin April 2001 and declined by ters in 1998 – 99 and 2001– 02, 15,000 jobs, or 0.7 percent, falling industrial demand by year-end. 2002 saw very litthroughout the 2001 recession tle change in total employment. and record-high natural gas inThe diffusion index (Figure 3 ) ventories, gas prices have typipeaked in August 2000 and cally defied gravity and remained slipped under 50 in March above $2 — often far above. 2001. Since that time, the index Given strong energy prices, has remained in the low 40s, the mystery is why oil field thus far providing no indication activity has remained subdued. of coming recovery. Domestic drilling began to The export-base employdecline from a seasonally ment (Figure 4 ) shows that adjusted peak of 1,281 rigs in Houston’s traditional industries 5 Figure 6 Coincident Economic Activity Index for Houston, 1988–2002 Index, July 1992 = 100 160 150 140 130 120 110 100 90 80 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 SOURCE: Authors’ calculations. peaked again in May 2001 at a level that exceeded the prior December 1998 peak by less than 1 percent. The number of export base jobs has since declined by a relatively mild 2 percent. Nonbasic activity has been affected by the prolonged period of no significant growth in basic jobs and by the continued lack of stimulus from the U.S. economy. Nonbasic employment has averaged annual growth rates of only 0.1 percent in 2001– 02. There has been no source of positive stimulus in Houston throughout 2002. Was It a Recession? Throughout the previous discussion and analysis, we have been careful to describe job growth over the last 16 years as slowing, turning flat or declining slightly. The emphasis on a single variable — employment — makes it difficult to talk about recession or a broad decline in the macro economy. Different variables — unemployment, personal income or retail sales, for example — might lead to different conclusions about the direction, timing or depth of a particular cyclical event. On the other hand, as the cyclical event occurs, there should be some correlation among the variables over time that provides information on a larger, unobserved variable called the business cycle. The Conference Board measures U.S. economic activity by ’00 ’01 ’02 a simple weighted average of several broad measures of macroeconomic activity, giving them equal weight after adjusting for volatility: personal income (less transfer payments), nonfarm employment, industrial production, and sales by trade and manufacturing. In recent years, a new and very different approach has emerged to measure the business cycle, a dynamic single-factor model of coincident economic activity created by Stock and Watson.5 The Stock and Watson approach uses broad measures of economic activity to estimate a single unobserved, underlying variable consistent with the general notion of a business cycle. The underlying variables chosen for Houston are nonfarm employment, the unemployment rate, real wages and real retail sales. Based on their correlation over time, we define a coincident index as a measure of the business cycle.6 All four of the selected variables are statistically significant factors in defining the Houston business cycle and carry the expected signs. Employment is restricted to entering the equation with no lags, but other variables can enter with lags if statistically significant. Employment, real wages and real retail sales enter the equation simultaneously, while the unemploy6 ment rate enters simultaneously and with a single lag. We first estimated the model from January 1980 through March 2002, the period for which all variables are available. We then updated it through October 2002 using data only on employment and the unemployment rate. The model is highly stable, and the size of the Houston economy provides a smooth series. The weights selected by the model emphasize nonfarm employment (.48) and real wages (.33) as the key variables, while smaller but significant information comes from the unemployment rate (.11) and retail sales (.08). The coincident index for Houston, based on July 1992 = 100, is shown in Figure 6. The index looks very much like a smoothed version of total employment in Figure 2, but it now contains much more information about the Houston business cycle. Timing and duration of cyclical events differ slightly between the two series. Was there a recession in the 1990s? The index in the 1991– 93 period is flat, indicating that Houston skirted recession for a prolonged period but never suffered a significant reverse. The business cycle does not show a decline that could be labeled a recession. The story is similar for 1998 – 99; again employment was flat with no significant decline, but for a much shorter period than 1991– 93. The current slowdown, however, does show a decline beginning in May 2001, although it amounted to only 1 percent by December of that year. There was no significant improvement throughout 2002 that would indicate recovery. Thus, after twice avoiding the label, the current downturn marks Houston’s first recession since the 1980s. Houston Business will revisit the question of whether economic recovery may be under way later this spring, after the employment data for 2002 are rebenchmarked. Is the recession mild? Compare the 1 percent decline in 2001 with Houston’s doubledip, oil-bust recession of the 1980s — a recession built on massive speculation in oil and real estate. The same coincident index tells us that between March 1982 and November 1983 the Houston economy declined by 12 percent; between November 1984 and January 1987 it fell another 10.1 percent. Houston may have found speculative excesses in 2001 in energy trading and downtown office space, for example, but the impact so far on the overall economy has been relatively mild. Conclusion Strong growth in Houston in the 1990s required more than oil; it needed both a growing U.S. economy and strong oil markets. When both factors were working, the Houston economy performed in stellar fashion. But weakness from either side quickly showed up in both the rate and breadth of total employment growth. Weakness in both the U.S. economy and oil markets essentially stopped the Houston economy in its tracks in 1991– 93 and 1998 – 99, and in 2001 it led Houston into its first minor recession since the oil bust. This 1990s pattern of no growth or very mild recession contrasts sharply with the huge economic setbacks that followed oil and real estate overspeculation in the 1980s. Although still a commodity-driven economy with roughly half of its jobs directly or indirectly dependent on oil, natural gas and petrochemicals, Houston’s business cycle has been substantially tamed since the 1980s. — Robert W. Gilmer Iram Siddik Iram Siddik is a student at Rice University. Notes 1 2 3 4 5 6 For a description of Houston’s economy during this period, see the following issues of Houston Business: “Houston in 1993,” February 1993; “Houston’s Slowdown: National Recession or Oil Patch Slump?” August 1993; and “Houston’s Economy: Still Slow in 1994?” December 1993. See the following issues of Houston Business: “Houston Again Shares State’s Economic Growth,” August 1995; “Houston Economy Shows Endurance and Renewed Strength,” October 1996; and “Houston Economy Heats Up,” August 1997. See these issues of Houston Business: “Asian Flu and Oil Glut Weaken Outlook for Houston,” March 1998; and “Weak Commodity Prices Take Toll on Gulf Coast Economy,” March 1999. For details on this period, see the following issues of Houston Business: “The Wheel Turns Again: Lessons from the Latest Oil Cycle,” June 2000; “Gulf Coast Expansion Waits for Upstream, Downstream Energy,” April 2002; and “Houston’s Near-Term Outlook: Slow Growth, Downward Risk,” October 2002. James H. Stock and Mark W. Watson (1989), “New Indexes of Coincident and Leading Economic Indicators,” NBER Macroeconomic Annual, ed. Olivier J. Blanchard and Stanley Fischer (Cambridge, Mass.: MIT Press for National Bureau of Economic Research), 351–94. Alan Clayton-Matthews and James H. Stock (1998 – 99) build an index for the state of Massachusetts based on the income tax base, sales tax base and unemployment rate in “An Application of the Stock/Watson Index Methodology to the Massachusetts Economy,” Journal of Economic and Social Meas- 7 urement 25: 183–233. The variables chosen for this index are the same as those used in an unpublished paper, by Keith Phillips and Jesus Cañas of the Federal Reserve Bank of Dallas, that examines the business cycle of Texas border cities. The authors would like to thank Phillips for suggesting the model for Houston and Cañas for estimating it. Houston H ouston shows few signs of emerging from the mild recession it entered early in 2001. Employment remains flat; the seasonally adjusted unemployment rate has continued to rise all year and now stands near 6 percent; and the local Purchasing Managers Index shows no forward momentum in energy or manufacturing. A sluggish U.S. economy and lackluster drilling have conspired to keep the Houston economy in the doldrums. Retail and Auto Sales For retailers, the holiday problem was not a shortage of customers. It was deep discounting, widespread promotions and fierce competition. Shoppers responded by filling the stores and walking away with retailers’ profits, making the consumer the holiday winner. Fortunately, retailers entered the holiday season with light inventories and had little trouble clearing out seasonal goods. Auto sales continue weak despite ongoing dealer incentives and promotions. November sales for Harris County were off 3 percent from 2001 and are down 8 percent year-to-date. Energy Prices and Drilling Oil and natural gas prices have risen sharply in recent weeks. Crude oil prices have been driven by a variety of factors: cold weather, OPEC’s decision to rein in production, the threat of war in Iraq and a general strike in Venezuela. The price of West Texas Intermediate rose from $25 per barrel in mid-November to $32 by late December. BeigeBook December 2002 Responding primarily to cold weather in the Midwest and Northeast, natural gas prices climbed from $3.80 per thousand cubic feet to more than $5 by mid-December. A record surplus quickly evaporated, pulling inventories to 17 percent below last year and 5 percent below the five-year average. Gas supplies remain adequate for a normal winter, but continued arctic weather could push prices even higher. Improved energy market fundamentals have not translated into increased domestic drilling; a rise in workover activity (a quick route to a production boost) and a jump in Texas drilling (mostly inexpensive gas projects) were the only responses. Total U.S. activity remained near 850 working rigs, the same level observed since last May. International activity has improved over the past two months, led by the North Sea and Latin America, but the general strike in Venezuela could reverse these recent gains. Petrochemicals and Refining Growth in petrochemical demand decelerated sharply at midyear, matching the slowdown in the rest of the industrial sector. Through year-end, there is still no indication of improved demand, prices are stable or declining, and the higher oil and gas feedstock prices are coming out of profit margins. Overcapacity remains a significant problem in key areas such as ethylene. Refining margins improved through mid-December as cold weather drove heating oil prices up faster than the price of crude. Since mid-December, the Venezuelan general strike has pushed prices up sharply, and several important Gulf Coast refineries could find themselves out of crude by early January if shipments don’t resume. High levels of oil product imports from Europe delayed a price response to potential gasoline and heating oil shortages, but gasoline pump prices were rising quickly by late December. Residential Real Estate November new home sales were up 2 percent compared with a year earlier, traffic was up 14 percent and housing starts rose 29 percent. Inventory is rebuilding from last year’s lows and now stands 41 percent higher than a year ago. November sales of existing homes, propelled by low interest rates, matched last year’s high levels. Apartment leasing activity is sluggish; low interest rates and strong single-family sales are pulling people out of apartments, and slow job growth is providing few replacement tenants. Rents are flat across all classes of units, with occupancy strong at the bottom of the market and weak at the top. For more information or copies of this publication, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is also available on the Internet at www.dallasfed.org. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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