Institute for Regional Forecasting www.bauer.uh.edu/irf
Houston Job Growth Takes a Mid-Year Breather Robert W. Gilmer Institute for Regional Forecasting C.T. Bauer College of Business University of Houston
Since the financial crisis the Texas economy has pulled away from the U.S. 135 130 125 Texas 120 115 110 105 100 95 U.S 90 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Federal Reserve Bank of Philadelphia
and Houston has pulled away from Texas 160 150 140 Houston 130 120 110 100 Texas 90 Jan-04 Feb-05 Mar-06 Apr-07 May-08 Jun-09 Jul-10 Aug-11 Sep-12 Federal Reserve Bank of Dallas
Houston is by far the fastest growing 160.0 major metro in Texas since 2004 150.0 140.0 130.0 120.0 110.0 100.0 Houston Austin Texas Fort Worth Dallas San Antonio 90.0 Jan-04 Jun-05 Nov-06 Apr-08 Sep-09 Feb-11 Jul-12 Federal Reserve Bank of Dallas
Year-to-date Houston job growth is running at 2.8 percent 6 4 2 0-2 -4-6 Note: December to December changes, except 2013 which is annualized year-to-date
8 Houston employment shows strength in recovery (3-month percent change at annual rates) 6 4 Houston 2 0-2 -4-6 -8 Jan-07 Apr Jul Oct Jan-08 Apr Jul Oct Jan-09 Apr Jul Oct Jan-10 apr jul oct 11-Jan apr jul oct 12-Jan apr july oct 13-Jan Bureau of Labor Statistics U.S.
Job growth slowed beginning mid-year (3-mo percent change, annual rates, s.a.) 7 6 5 4 3 2 1 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
Purchasing managers index U.S. and Houston compared (s.a.) 75 70 65 Houston 60 55 50 45 40 U.S. 35 30 25
11 10 9 8 7 6 5 4 3 2 Houston unemployment rate falls on strong job growth %, s.a. U.S. Houston Bureau of Labor Statistics
Is too much good news now driving Houston s economy? Basic v non-basic industries
Since 2010,Houston, growth led by mining, Nonfarm Upstream Oil Construction Manufacturing Wholesale Retail Transpt and Utilities Information Finance Prof/Buss Serv Ed and Health Leisure/Hospitality Other Serv Gov't manufacturing, prof services (% change Dec 2009 Dec 2011) -5 0 5 10 15 20 25 30
Since Dec 2011 growth is much more Nonfarm Upstream Oil Construction Manufacturing Wholesale Retail Transpt and Utilities Information Finance Prof/Buss Serv Ed and Health Leisure/Hospitality Other Serv Gov't broadly based -1 0 1 2 3 4 5 6 7 8
30 Too much good news? Economic base slows, non-basic growth accelerates (3-month change at annual rates, s.a) 25 20 15 10 Base NonBase 5 0-5
Slowdown? Yes but healthy growth still likely for Houston 120,000 110,200 Houston Annual Job Growth Q4/Q4 100,000 80,000 60,000 81,500 61,600 81,200 40,000 20,000 0 2012 2013 2014 2015
What makes Houston grow? U.S. economic growth Global growth drives local exports, keeps oil prices high Energy upstream and downstream
The U.S. economy has provided little support for Houston
Gross domestic product (%-change, annual rates) 6 4 2 0-2 2005 2006 2007 2008 2009 2010 2011 2012 2013-4 -6-8 -10
Job Market Improves Too Slowly, Employment Growth Lags Recovery
U.S. payroll jobs still 2.0 million short of prior peak in 2007 140000 138000 136000 134000 132000 130000 128000 Jan-06 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13
U.S. Employment Growth In Thousands of New Jobs per Month,1990 to 2011 350 150-50 -250-450 3-month average -650-850 Bureau of Labor Statistics
What is missing from growth at 15 quarters after the trough? Contribution to GDP (%) 3 Recent Recoveries This Recovery GDP 3.9 2.2 Cons 2.6 1.5 Res Inv 0.5-0.4 Fixed Inv 0.9 1.2 Net Exports -0.6-0.20 Gov t 0.50-0.3 Consumption, housing, and state/local gov t all a drag (%) -2-1 0 1 GDP Cons Res I Non Res I Govt Net X
Expect improvements in 2013? Housing market will start to add to GDP State and local government revenues allow them to grow The consumer would have made substantial progress on deleveraging except for $200 billion in new taxes
Is the housing upturn finally here? 2,000 1,800 1,600 1,400 1,200 1,000 800 Permits Starts 600 400 200 0 00 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6 '0 7 '0 8 '0 9 10 11 12 13
Housing prices stabilized and turned 20.0 15.0 10.0 5.0 up over last summer of 2012 (index: 12-mo percent change) 0.0-5.0 Case Shiller FHFA monthly -10.0-15.0-20.0-25.0
80 Pessimism quickly recedes in new home market (NAHB homebuilder sentiment) 70 60 50 Optimism 40 30 Pessimism 20 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Consumer still working to deleverage after housing debt build-up (Ratio of debt to disposable personal income) 1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 0.95 0.9 Jan-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10 Jan-12 Federal Reserve Board, BEA
University of Michigan Consumer Sentiment Data 100.0 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0
Retail sales, ex. Autos, 2005-2012 Monthly sales ($million) 350000 330000 310000 290000 270000 250000 Dec-04 Nov-07 Oct-10 40 30 20 10 0-10 -20 Monthly change at annual rates Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 May-12 Apr-13-30 -40 retail sales 6-mo average * Seasonally adjusted data
Auto Sales Still In Recovery Million units, annual rate 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 2006 2007 2008 2009 2010 2011 2012 2013
New taxes in 2013 finally catching up with the consumer Payroll taxes rise $126 billion, Bush-era tax cut loss to high-income earners will be $50 billion, and Affordable Care Act adds $24 billion. Total tax increase is $200 billion or 1.6 percent of disposable personal income. Expected real consumer spending to drop by one percent or more in the first half of 2013, but delayed a quarter
U.S. GDP growth muddles through at 2.0-2.5 percent in 2013 6 (Percent change 2007 to 2014) 4 Forecast 2 0-2 -4-6 -8-10
Houston real estate is in trying to catch up with past economic growth
Existing homes sales in Houston are back 8000 7500 7000 6500 6000 5500 5000 4500 4000 3500 on a strong track (monthly MLS, s.a.) 3000 Jan-00 Jun-01 Nov-02 Apr-04 Sep-05 Feb-07 Jul-08 Dec-09 May-11 Oct-12
Home prices did not fall in Houston Dollars 190000 180000 170000 160000 150000 140000 130000 120000 110000 100000 like elsewhere in U.S. (median price, s.a.) MLS, Texas A&M Real Estate Center
Houston single-family inventory falling 9.0 sharply 8.0 7.0 Months supply at 3.1 in July 6.0 5.0 4.0 3.0 MLS, Texas A&M Real Estate Center
Houston single-family permits began to pick up in 2012 SF Permits 6-mo average Texas A&M Real Estate Center
Local Real Estate Development Moving Very Quickly to Catch Up With Past Growth All markets see rent and construction rising, vacancy rates and cap rates falling Apartment construction is focused inside the Loop, but Woodlands/Montgomery County is leading an acceleration in the suburbs Large blocks of office space have disappeared in hottest markets like the Energy Corridor, West Sam Houston, and Woodlands. Retail led by suburbs, especially grocery-anchored strip malls Industrial has lowest vacancy rate in decades
Domestic drilling pulls back in 2012-2013
Horizontal Drilling Grows with Shale Gas, Complex Oil Projects 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% % DIR. % HORIZ. % VERT. 10.0% 0.0% 1/5/2007 1/5/2009 1/5/2011 1/5/2013 Baker Hughes
Since 2005 U.S. Marketed Natural Gas 2200.0 2100.0 2000.0 1900.0 1800.0 1700.0 1600.0 1500.0 1400.0 1300.0 1200.0 Production Has Grown Rapidly (Billion cubic feet) DOE/EIA, six month average, seasonally adjusted
Natural gas price, 1997-present ($/mcf) 14 12 10 8 6 4 2 0 Jan-1997 Jun-1999 Nov-2001 Apr-2004 Sep-2006 Feb-2009 Jul-2011 DOE/EIA
Is marketed production of natural gas finally peaking? 2200000 2100000 2000000 1900000 1800000 1700000 NGMkt seas adj 1600000 1500000 1400000 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 DOE/EIA
Natural gas inventories return to normal 80 with help from cold spring? (percent above or below 5-year average) 60 40 20 0-20 -40 DOE/EIA
Natural gas price below $4.50 keeps takes out gas-directed rigs 1800 1600 1400 1200 1000 800 600 400 200 Gas Rigs Gas Price 0 Jan-02 Sep-03 May-05 Jan-07 Sep-08 May-10 Jan-12 16 14 12 10 8 6 4 2 0 Gas Rigs Gas Price $4.50/mcf
Oil price above $65/b keeps oil-directed rigs busy 1600 140 1400 Oil Rigs 120 1200 100 1000 800 600 400 200 Oil Price 80 60 40 20 Oil Rigs Oil Price $65/b 0 Jan-02 Sep-03 May-05 Jan-07 Sep-08 May-10 Jan-12 0
High Oil/Low Gas Price Push Drilling Toward Oil-Directed Activity 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% Oil-Directed Gas-Directed 20.0% 10.0% 0.0% 01/05/07 01/05/09 01/05/11 01/05/13 Baker Hughes
2200 2000 1800 1600 1400 1200 1000 800 600 400 200 U.S. Rig Count Weakens on Low Natural Gas Prices Baker Hughes
The frantic edge is off domestic oil exploration and production Capital spending will be flat in 2013, margins squeezed, local hiring has already slowed There is good news offshore, where deepwater drilling continues to improve There is a lot of catch-up on infrastructure on land and offshore that won t show up in the rig count Oil-directed activity now dominates U.S. drilling activity
Global drilling is healthy Oil is a global product, easily transported and sold around world Drilling outside North America bounced back strongly after the financial crisis, should be strong in 2013 These markets are important for Houston-based producers and oil-service firms. It is high revenue, high margin work for service companies. Like the U.S., these markets are 80 percent dependent on oil-directed activity
International Rig Count 1400 1300 1200 1100 1000 900 800 700 600 500 Rises Steadily 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Baker Hughes Excludes Iran and the Sudan
Share of foreign oil-directed activity today by region 90 80 70 60 50 40 30 20 10 0 Total Europe Middle east Africa Latin America Baker Hughes Percent Drilling Activity 2013 Q2 Asia Pacific
Technology + High Oil Prices Unlock Oil Reserves at a price Dollars/Barrel Where? Deep-water Drilling $50-$85 Gulf of Mexico, West Africa, Brazil Tar Sands $65-$75 Alberta, Venezuela, Russia, Congo Shale Oil $65-$75 North Dakota, Permian Basin, Eagle Ford
Who sets the price of oil: Exxon?, the Federal Reserve? the Illuminati?
For the last decade world oil prices have been driven by emerging markets Since 2003, all the growth in the global demand for oil has come from emerging markets, especially Brazil, China, and India It has not just been oil, but food, agricultural products, and metals that have seen prices soar China alone accounts for one-third of increased oil demand since 2003. China and other Asia are nearly 60 percent.
600 500 Oil part of a wider commodity price boom since 2003 400 300 200 100 Food Ag Raw Materials Metals Crude Oil 0 International Monetary Fund
%/yr 10 8 6 4 2 The developing world has been the global engine of growth since 2008 (percent GDP growth) 0-2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-4 -6 IMF World Economic Outlook update, January 2013
Where has the emerging market growth come from? They have developed deep and rapidly growing domestic markets They have been good policy actors balanced fiscal budgets, independent central banks, and enormous foreign exchange reserves They are now large markets, this year passing the developed nations in total GDP
Growth in the Demand for Oil Comes from 14 12 10 the Emerging Markets (million b/d) 8 6 4 2 Global OECD Non-OECD 0-2 -4 1996-2003 2003-2012 International Energy Agency
Percent contributions to oil demand growth since 2003 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 32.3% China 25.0% Other Asia International Energy Agency 16.9% Middle East 13.7% Latin America 5.6% 5.5% FSU Africa
Global Growth Sluggish in 2013 (% GDP Growth) 2011 2012 2013 2014 World 4.0 3.2 3.3 4.0 U.S. 1.8 2.2 1.9 3.0 Europe 1.4-0.6-0.3 1.1 Japan -0.6 2.0 1.6 1.4 --- --- --- --- China 9.3 7.8 8.0 8.2 India 7.7 4.0 5.7 6.2 Brazil 2.7 0.9 2.0 4.0 Source: IMF World Economic Outlook, April 2013
Houston s ties to oil and natural gas
120 110 100 90 80 70 60 50 40 30 20 Houston s upstream exploration jobs now total over 100,000 Producer +Services Producer Employment 1990 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 Bureau of Labor Statistics
Annual earnings in upstream oil double the typical Houston job in 2011 2011 ($000/worker) 160 160 140.5 140 140 120 120 100 100 80 71 80 60 60 40 40 20 20 0 0 Upstream Oil All Jobs Bureau of Economic Analysis 2001-2012 Upstream Oil All Houston Jobs 2001 2003 2005 2007 2009 2011
260 Houston adds manufacturing jobs since 2003 manufacturing employment (000) 250 240 230 220 210 200 190 180 Bureau of Labor Statistics
Machinery and Fabricated Metal Bring Thousand 65 60 55 50 115,000 Jobs in Houston 45 40 35 Machinery Fab Metal 30 25 20 199019921994199619982000200220042006200820102012 Bureau of Labor Statistics
But production hours worked fall in in mid-2013 50 48 46 44 42 40 38 36 34 32 30 Houston US Bureau of Labor Statistics
Houston is the capital of a refining and petrochemical complex on the Texas and Louisiana Gulf Coast
Gulf Coast Refining Margin ($/bbl) 30 25 20 15 10 margin Six-mo avg 5 0 Pace refining margins, Oil and Gas Journal
Four of eight largest ethylene complexes in the world are in Houston Company Plant location Capacity (million tpy) Formosa Taiwan 2,935.0 Nova Alberta 2,811.7 Arabian Petrochem Saudi Arabia 2,250.0 ExxonMobil Baytown 2,197.0 ChevronPhillips Sweeny 1,865.0 Dow Netherlands 1,800.0 Ineos Chocolate Bayou 1,752.0 Equistar Channelview 1,750.0 Anlou Saudi Arabia 1,705.0 Equate Kuwait 1,650.0 Oil and Gas Journal, 7/2/2012
Natural gas energy content equivalent to $20 per barrel for oil 140 120 100 80 60 40 oil $/b nat gas $/b 20 0 Jan-01 Nov-02 Sep-04 Jul-06 May-08 Mar-10 Jan-12 DOE/EIA and calculations of the author
70 Ethylene Margins (cents per pound) 60 cents per pound 50 40 30 20 10 0 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 2010 2011 2012 2013
August margins for ethylene were 41 cents per pound in North America, -17 cents elsewhere 150 130 Feedstock 110 90 Feedstock 70 Other Variable 50 Margin Fixed Cost 30 10 Feedstock Margin Margin -10-30 Etane Naphtha Muse, Stancil Cash Ethylene Margins, Oil and Gas Journal, 2013
New ethylene capacity concentrated on the U.S. Gulf Coast Company Location Capacity (mm lb/yr) Start-Up Exxon Baytown 3,300 2016 Chevron Phillips Baytown 3000 2017 Dow Chemical U.S. Gulf Coast 4,200 2017 Ineos Lake Charles, LA 3,000 2018 CP Chem Baytown, TX 2,500 2016/2017 Braskem/Idesa Mexico 2,200 2015 Shell Chemical Pennsylvania 2,000 2016+ Formosa Point Comfort, TX 1,760 2015 LyondellBasell LaPorte, Texas 1,450 2012-2014 Dow Chemical Hahnville, LA 800 2012Q4 Williams Lake Charles, LA 600 2013Q3 Westlake Chemical Lake Charles, LA 230 2012 Ineos Chocolate Bayou, TX 230 2013
Heavy construction to boom in U.S. and on Gulf Coast The American Chemistry Council recently counted 97 chemical project announcements with $77.1 billion in construction cost 7 proposed LNG export terminals Numerous pipelines and processing facilities connect new oil and gas plays to Houston Many general manufacturing announcements for energy, plastics, tires, iron and steel
It is an exciting time to be in Houston We have been growing rapidly for nearly a decade, and saw the local economy accelerate after the financial crisis This could last another decade Shale, tar sands, and deep-water drilling mean we can have a serious conversation about energy independence in the U.S. We will need to rework and expand energy infrastructure in pipelines and processing We have a new petrochemical industry to build
It all depends on the price of oil? Upstream, yes. The collapse of natural gas prices and weaker natural gas liquids prices put the burden on oil But weak natural gas prices are driving downstream expansion and construction. It could cushion any blow But any threat to oil prices is a prices threat to Houston s current expansion
IMF says that medium-term risks to the global economy remain high Europe continues to stagnate or has a financial crisis Fiscal trouble in the U.S. or Japan There is less slack in the advanced economies than thought, and inflation breaks out Unconventional monetary policy backfires There is a sustained slowdown in key emerging markets
Where is the price of oil going? Low oil prices pushed Houston into deep recessions in 1982, 1986, 1999, and 2009 The current expansion is again dependent on oil prices, and oil price depends on the health of the global economy No one knows where oil price will be next month or how this ends. Don t bet your business on the price of oil
Houston Job Growth Takes a Mid-Year Breather Robert W. Gilmer Institute for Regional Forecasting C.T. Bauer College of Business University of Houston
20 Domestic Consumption of Oil is Stable, Production Rising through 2014 (million b/d) 18 16 14 12 Production Consumption 10 8 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 DOE/EIA
11 10.5 10 9.5 9 8.5 8 7.5 7 6.5 6 U.S. Net Imports Fall through 2014 (million b/d) Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 DOE/EIA
Good time to look to foreign markets for growth Barclay s forecast year-over-year growth of nine percent outside North America The market is $460 billion, 2.5 times the size of the U.S. market The return of Iraq and 300 rigs has been the story of the last decade Now it is about complex geologies, and deepwater drilling
Houston has largest gains in upstream oil employment in Texas, 2006-2012 35,000 33,100 30,000 25,000 20,000 15,000 15,240 21,159 Eagle Ford Barnett Permian Basin Houston 10,000 6,970 5,000 0 BLS payroll employment and FRB-Dallas calculations
Weekly hours surged for production workers in Houston manufacturing 50 48 46 44 42 40 38 36 34 32 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Bureau of Labor Statistics Houston Dallas US
Chemical Plants Affected By Hurricane Rita (Percent N.A. Capacity Shut Down at Peak) Ethylene Steam Cracker: 58.5% RG Propylene: 30.7% Benzene: 68.5% Polyethylene: 63.0% Styrene: 85.3% Butadiene: 95.8% Data from CMAI, Inc. and expressed as percent of North American Capacity