The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • Houston’s Near-Term Outlook: Slow Growth, Downward Risk If Houston avoids the worst and the U.S. economy and drilling activity suffer no significant reverses, the local economy could see 2 percent job growth next year. If a significant reversal of some kind postpones expansion, the current lack of job growth in Houston could linger for much of the year. E conomic forecasting may be deskbound statistical work, but at times it presents its own risks. Admittedly, the risk is not physical; rather, it is to personal and professional reputations, and it occurs partly because forecasters are often deficient in explaining the uncertainty that accompanies their facts and figures. Last year offers an excellent example of a moment when economic forecasters repeatedly found themselves a step behind the headlines: The expected soft landing turned into a hard one, then into a recession and finally into a recession made worse by the events of September 11. Perhaps we have arrived at another moment when current events can overcome the strongest statistical trends, as war, weather and growing questions about the strength of the U.S. economy all figure OCTOBER 2002 into Houston’s prospects for renewed job growth. This article summarizes Houston’s current economic conditions and nearterm outlook for job growth, with an emphasis on the many uncertainties that accompany the outlook. The U.S. and Global Economies If you want to foresee growth in the Houston metro area, you only need to know the outlook for the U.S. economy, the global economy and energy. In 2001, we began the year with forecasts of bright prospects ahead on all fronts and found ourselves disappointed by all three. The U.S. economy moved into recession by March, the rig count was falling by July and world economic growth fell short of its 2001 forecast by half. Houston’s prospects of 3 percent or better job growth in 2001 slowly evaporated month after month, and the year ended with only a 0.2 percent increase in employment, measured from December to December. Now we find ourselves on the other side of the cycle. The U.S. economy resumed growth Figure 1 Recovery Often Proportional to Decline, with Current Recovery Similar to Past Declines Percent period of rethe risks have moved mostly to newed weakness the downside. The InternaDecline in output has emerged tional Monetary Fund, for 7 Recovery in output since July. Total example, estimates world 6 hours worked growth at 2.8 percent in 2002, 5 fell, and measup from 2.2 percent in 2001, ures of industrial and forecasts acceleration to 4 production turned 3.7 percent in 2003. 3 particularly weak, For a port city and export 2 raising concerns center like Houston, perhaps about a doublethe best news from interna1 dip recession. tional events has been the 0 The uncertainty dollar’s decline against a basket ’53–’54 ’57–’58 ’60 ’69–’70 ’73–’75 ’80 ’81–’82 ’90–’91 ’01 of a prospective of world currencies. Since early war in Iraq and this year, the dollar has lost a prolonged about 3 percent of its value, in fourth quarter 2001, led by period of high oil prices no making U.S. exports cheaper strong consumer spending doubt caused part of the brake abroad and foreign competidespite dire predictions of a on growth. However, the best tors’ products more expensive recession extended by Septemguess is more sluggish growth at home. This is particularly ber 11. Output, as measured by ahead; leading indicators have important to key Houston gross domestic product, grew remained flat in recent months, industries such as chemicals at 2.7 percent in the fourth financial markets are sending and industrial machinery. The quarter, followed by 5 percent mixed messages about the decline so far is only about and 1.3 percent growth the first business cycle and forecasting one-third of the dollar’s run-up and second quarters of this models tell us the probability since early 2000, but it is very year. Figure 1 shows that outof recession ahead remains welcome news for Houston. put growth after three quarters small. War, further oil shock or of recovery is normal for a a sour response by consumers Oil and Natural Gas Drilling mild recession. Like a rubber to continued stock market After bottoming out at record ball, the bounce-back is often declines could throw all these low levels after the Asian finanproportional to the height from models and indicators out the cial crisis in April 1999, the which the ball is dropped, and window. number of U.S. working rigs the figure shows both the deGrowth in the global econclimbed rapidly to nearly 1,300, cline and the rebound of past omy similarly picked up in late the highest level since 1986. recessions. If the last two reces2001 and continued through Last July, however, the rig sions have not bounced back the first quarter of 2002. Then, count began to fall again and like the others, it is because in tandem with the ball did not drop as far. the slowing Figure 2 shows that the same growth in the Figure 2 rule of proportional rebound United States and Bounce-Back in Jobs Proportional to Recovery Except in Last Two Recessions usually holds for employment Europe, global Percent as well. But the last two recesfinancial markets 6 sions have been different. The began to deterioDecline in employment 1990 – 91 recession had a jobless rate, particularly 5 Recovery in employment recovery, with growth so weak in South America that it did not spur employers and Turkey. Like 4 to add new workers. The current the forecasts for 3 recovery from an even milder U.S. growth, the recession seems to be followglobal outlook 2 ing the same jobless pattern. has ratcheted 1 Although the recovery down a notch, appears to have fallen into with growing 0 place late last year, a definite recognition that 8 –1 ’53–’54 ’57–’58 ’60 ’69–’70 ’73–’75 ’80 ’81–’82 ’90–’91 ’01 Figure 3 Basic and Nonbasic Employment in Houston, 1996 to Present Index, January 1996 = 1 reached 738 before turning and climbing again in April. After quickly adding 100 rigs, the count has moved sideways near 850 for six months. In recent years, 80 to 85 percent of the drilling in the United States has been directed to natural gas, not oil, and swings in the inventory and price of natural gas mostly explain the rig count gyrations. During the 2001 recession, inventories built rapidly because natural gas was not being used under boilers or in industrial processes; then, as the economy entered recovery late last year, a warm winter kept inventories full. Now we find ourselves headed toward the 2002 – 03 heating season with record high inventories. Gas prices have been relatively high in recent months, but the downward price risk posed by these bloated inventories has kept drilling subdued. For many producers, the memories are still fresh of the damage their balance sheets sustained in the 1998 – 99 downturn. The current high inventories are sufficient to carry the United States through a normal winter without a shock to gas prices. But a normal winter (at least) is probably required to support the price of natural gas and keep it high. In other words, the nearterm prospects for a significant piece of Houston’s economy depend on the weather, especially on how cold it is in the Middle West and Northeast. A decline in drilling poses a major risk to a near-term renewal of job growth in Houston. Houston’s Prospects The best bet is that conditions are slowly falling into place to assure Houston some measure of re1.3 newed employment growth next Nonbasic 1.2 year, as the U.S. and global economies improve. 1.1 However, the unBasic certainties are almost palpable 1 — war, weather, the stock market, .9 consumer senti’96 ’97 ’98 ’99 ’00 ’01 ’02 ment—and almost SOURCES: Texas Workforce Commission; author’s calculations. all point to a significant risk of falling short. Houston entered 2001 with During the latest recession close to 3 percent employment the important basic jobs — the growth, but growth slowed by ones that drive growth — have midyear as the national recesweakened in Houston, but not sion and the drilling downturn nearly as much as during the caught up with it. Job growth 1998 – 99 downturn. Many was slightly negative in the Houstonians outside the oil and second half of 2001 as Septemgas sector or petrochemicals ber 11, layoffs at Continental did not even notice the 1998 – 99 Airlines, the Compaq merger and downturn because nonbasic the Enron meltdown all took activity, such as retail trade and their toll. Throughout 2002, job construction, continued to exgrowth has been near zero. pand so rapidly, largely because Figure 3 presents another of pent-up demand generated way to look at Houston’s by the previous five years of employment. This approach is strong economic growth. Now, particularly useful for considerhowever, nonbasic activity, ing the prospects of a relatively having caught up with the needs small economy caught in the of the city, has flattened out; greater forces of national and moreover, slow growth and the global expansion. Employment decline in export activity are not is divided into two parts: basic providing any push to these and nonbasic. Basic jobs are secondary sectors through job those associated with export and income growth. activity, which simply entails If Houston avoids the worst shipments out of the metroand the U.S. economy and politan area to other regions drilling activity suffer no signifof the United States as well as icant reverses, the local econto foreign countries. Oil and omy could see 2 percent job gas machinery and chemicals growth next year. If a signifiare important examples of these cant reversal of some kind local exports. Exports are impostpones expansion, the curportant because they pay for rent lack of job growth could imports (autos from Detroit, linger for much of the year. financial services from New Many of the current uncertainYork), as well as nonbasic, inties should have worked themherently local activity such as selves out by early 2003. food stores and dry cleaners. Houston R ecent data have not been kind to Houston’s prospects for recovery from the current slowdown. Employment remains in neutral, stuck at roughly 2.12 million total jobs since June 2001. After four months of data showing weak expansion, the Houston Purchasing Managers Index slipped back in September, indicating slight contraction. Domestic drilling activity, which should be rising seasonally, has been near 850 working rigs since April. All indicators point to an economy making little progress as we approach year-end. Retail Sales Local retailers are finding sales harder to come by. They are having trouble even matching last year’s post-September 11 sales. Everyone now seems to be sharing the pain, even discount stores that had previously seemed immune and furniture stores that had been buoyed by strong home sales. Given the current sluggish economy, achieving last year’s holiday totals will be difficult. But this year retailers face the added problem of a holiday season six days shorter than last year’s. Real Estate Apartment occupancy has been rising seasonally, but Class A occupancy remains down compared with last year. Leasing incentives are on the rise. Occupancy is under pressure as low interest rates make homebuying attractive and more difficult economic times BeigeBook October 2002 force singles and families to double up. Low interest rates are still supporting new home sales; August 2002 sales were well above those of a year earlier. Starts, inventory and traffic were all up by double digits over the previous August. Existing home sales continue to hover just below last year’s sales totals, but inventory has grown to one-third higher than its 1999 low point. Energy Prices and Oil Services Crude oil prices have been supported by talk of war with Iraq, OPEC’s decision not to raise its quotas and low inventories. Hurricanes Isidore and Lili both closed the Louisiana Offshore Oil Port, cutting deliveries to Gulf Coast refineries and pushing prices higher. Crude rose over $30 per barrel as the hurricanes approached but has since fallen back to $28 per barrel. Although the hurricanes briefly shut down some gas production, natural gas inventories continue to head toward record levels as the heating storage season ends. Gas prices surged over $4 per thousand cubic feet during Isidore and Lili but fell back to $3.75 afterward. Growing natural gas inventories have kept drilling activity stalled since April at about 850 working rigs, with no indication of a significant fourth-quarter pickup. With the slowdown lasting longer than anticipated, talk of renewed layoffs is surfacing. Refining and Chemicals Poor profit margins induced refiners to cut production in September. Then Isidore and Lili briefly closed some refineries and halted crude deliveries to the Gulf Coast. Heating oil inventories that looked comfortable six weeks ago are suddenly much tighter, and the prices of both heating oil and highway diesel fuel have surged. Petrochemical demand has flattened out, and the series of price increases for plastics products has ended. Purchases made to restock inventory or beat price increases worked their way out of the system in September, leaving only industrial demand to fuel growth. As a result, sales turned weak to nonexistent. Even for products such as polyvinyl chloride and polyethylene, whose prices had moved up steadily all year, the price increases ended. In some cases, customers are now asking that producers reverse previous increases. 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.
@FedFRASER