Houston Updates

Solid Growth for Houston in 2024: Local Economy Settling into a Normal Post-COVID World

March 19, 2024

When the Federal Reserve finally began raising interest rates in March 2022, financial markets and economists set their expectations for a quick downturn that never arrived.  Economists expected that after 12-18 months we would see a mild but quick drop into recession.  However, with the built-up strength of the consumer, that quick fall has yet to happen.  Perhaps the best analogy for what has happened – in both the US and Houston – is that the economy took the escalator down instead of the elevator. 

In fact, the long ride down is probably now ending as the economy finally seems to be normalizing and returning to pre-COVID trends. This is visible in both US and Houston households with incomes, employment, and spending all showing signs of a return to normal pre-COVID patterns.  The question remaining is what happens when we get to the bottom of the escalator?  Do we just walk off into a soft landing and resume pre-COVID growth like it was 2020 again, or do we trip and find a harder landing than expected as recession finally arrives? 

The worst outcome would probably be a reacceleration of US growth that never lets us off the escalator, and a recent pick-up in employment numbers raises concerns about both the US and Houston.  The six months leading to last November saw monthly US job gains of 205,000 jobs per month that followed a distinct cooling trend dating back to early 2022.  But the last three months broke this trend with large consecutive gains that averaged 265,000 new jobs per month.  And this was after major downward revisions were made to these months by the Bureau of Labor Statistics in March.  The household sector – jobs, spending, wages -- has been the main barrier to the Fed cutting rates and continued news like this could put the soft landing at risk. 

For Houston, the Texas Workforce Commission also had a 2023 surprise with March benchmark revisions that brought a bump in local growth from a previously estimated annual growth of 70,100 to a revised 102,900.  Despite the big increase, and unlike the US, the trend downward for job growth in Houston remains clearly in place even after the new numbers are worked into recent history.   

Even without these surprises, our forecast already has good news and upward revisions to the economic outlook that is built into it.  The primary source of improvement is continued upward in revisions to the US economic outlook by the Survey of Professional Forecasters and sustained healthy growth in Houston.  Adding the recent upward revisions improves it yet again.  However, we are assuming for now that the soft landing scenario and a continued cooling of the post-COVID economy remains in place.  We are still getting off the escalator relatively soon.  Most important, there is no explicit assumption of a re-acceleration in the US economy that would force the Fed to hold today’s interest rates high for a prolonged period or to raise them further. 

The US Economic Outlook

For the short-run US forecast we rely on the Survey of Professional Forecasters.  The SPF is the oldest quarterly survey among US economic forecasts.  It was compiled and published by the NBER from 1960 to 1990, when the Federal Reserve Bank of Philadelphia was asked to take it over.  Its results are published quarterly on the Philadelphia Fed website. 

Participation in the survey is geared to 35-40 professional macroeconomic forecasting groups in academics, consulting, banking, and industry.  Compare this to the general survey of National Association of Business Economics membership who may or may not be forecasters or to the heavy financial-sector participation of the Wall Street Journal’s outlook survey. 

Despite sharply rising rates, the SPF has not forecast a recession in this round of tighter monetary policy.  Figure 1 shows the results of the Survey over the last six quarters for gross domestic product (GDP), the broadest measure of the economy.  Forecast results are shown for six quarters, allowing us to compare August 2022 to the latest SPF forecast available. 

We saw a moderately strong economy in mid-2022, then an economy that was assumed to weaken through May 2023 according to the SPF, but which has now shown a return to better growth over the last three quarters. If we average the four forecast quarters in each SPF release last year, we see GDP growth projections increase steadily from 0.9 percent to 1.0%, 1.2%, and 1.3%, and finally we see 1.6% early this year.  This latest forecast runs slightly on the low side of long-run trend growth of 1.6-1.7% and looks more and more like a soft landing with limited cyclical slowing.   

Figure 1

The US economy probably accounts for 60-70 percent of the cyclical change in Houston, and the US variable we rely on most heavily for Houston’s forecast is US payroll employment. Regional economic data is limited compared to the wide-ranging and detailed data available for the US.  In Houston, GDP and personal income figures are published only once a year, for example.  Payroll employment, in contrast, is available monthly and provides substantial detail that allows comparison of Houston to US performance.    

Figure 2 follows the format of Figure 1, except now substituting US payroll employment.  A typical number of monthly US jobs over the dozen years leading up to the pandemic was about 150,000. Like GDP, job growth had already been projected to weaken by the August forecast of last year, weakened further in following quarters, but then strengthened after last summer.  It currently shows the next four quarters running at an improved 122,600 jobs per month.  Even with this improvement, we still see coming quarters running below trend job growth, although with no recession in sight.

Figure 2

The most striking feature of these recent forecasts, however, is the persistence of job growth at higher than forecast levels throughout 2022 and 2023.  And the persistence of the SPF membership in wrongly forecasting a sharp slowdown in the face of what turned into sustained growth and outsized job-growth numbers. In Figure 3 we can see that the SPF was certainly in too much of a hurry for slower growth to arrive, but that growth has been slowly falling for some time and returning to trend in both the US and Houston.  Figure 3 is a nice picture of the economy taking job-growth escalator down instead of the elevator.  The SPF forecast is for further slowing to below trend but no recession.

Figure 3

More important, and as discussed earlier, there is no reacceleration of US growth anticipated in the outlook.  The last three months of 2023 show consecutive months averaging 265,000 jobs, or 60,000 jobs per month higher than the preceding six months. These months are always mixed up in holiday shopping and difficult seasonal adjustments.  While not yet alarming, they serve to remind us that as we move from slow to steady growth we also risk a reignition of inflation that also could bring higher interest rates from the Federal Reserve.  Continued strong job growth like this will certainly set off alarm bells at the Fed. 

This unexpected consumer strength in 2023 is witness to the stock of accumulated cash during and following the pandemic. (Discussed at length below.) The US economy has already weakened on a number of fronts.  Both US and Houston manufacturing fell into recession in mid-2022 and the wholesale trade sector quickly followed.  Even quicker declines came from interest-sensitive sectors like single- and multi-family housing, commercial real estate, and banking.  It was the large consumer sector that had refused to buckle under high interest rates, but signs of slower growth are now showing up in both income and spending, as well as jobs.     

The End of COVID Stimulus … And How the Consumer Keeps Spending

The COVID pandemic is over, but the consequences of the policy measures taken to fight it  remain central to the US outlook. The key economic problem in today’s economy remains inflation, with the CPI breaking out of its two-percent range in March 2021 following closely on the heels of the second and third rounds of fiscal stimulus.  Year-over-year headline CPI inflation reached 8.6 percent by June 2022. 

While the later rounds of fiscal payments set inflation firmly on an upward path, the Federal Reserve kept its foot on the accelerator with zero interest rates for too long.  Very low rates were maintained throughout 2021 while the Fed attributed the early inflation to a breakout to post-COVID supply-chain issues.  A tremendous financial boom through 2020-21 used this low-rate environment to add as much as $15 trillion to household balance sheets before the Fed reacted and began to tighten monetary policy in 2022.  The consequences of higher rates and other Fed efforts to slow the economy are still at work.  The mystery throughout the post-COVID era is sustained household strength in spending as COVID stimulus wears off and inflation-adjusted income has slowed.    

The fiscal stimulus came in two waves of $2.5 trillion dollars each, first in early 2020 during the lockdowns, followed by two smaller rounds in late 2020 and early 2021 that together totaled another $2.5 trillion. Two and a half trillion dollars was about $16,800 per US household in 2020, and each round saw half or more of that cash flow to individuals directly or indirectly -- but quickly and as needed.  Most went into the bank accounts of households and businesses through economic impact payments, the paycheck protection program, and enhanced unemployment checks. 

In Figure 4, the solid blue line shows the pandemic-period track of total personal income (including stimulus), and the solid red line is the wages, salaries, and income of the self-employed (no stimulus).  Each point compares these measures to pre-pandemic levels in February 2020.  The initial round of stimulus came against a backdrop of consumer shock and lockdowns, along with a ten percent drop in wages and salaries that was immediately matched by a ten percent jump in stimulus-driven personal income.  These cash payments appeared to quickly right the economic ship by mid-2020 by offsetting wage losses and delivering record levels of income.  Pre-pandemic levels of wages and salaries were fully restored by November 2020. 

Figure 4

Figure 4 also shows us an economy that is now expanding on its own.  The solid red line for wages and salaries has been growing rapidly since late 2020 and now stands 22.1 percent above pre-COVID levels.  The solid blue personal income line has slowed as the stimulus recedes, although it is now being carried forward nicely by wages and salaries and also is 22.1 percent above pre-COVID.  However, the gains are much less impressive if inflation is removed as shown by the broken lines. Personal income is then up only 5.6 percent over four years and wages and salaries up only 5.9 percent, or at annual rates of 1.4 and 1.5 percent since the lockdowns. The twenty-year trend before COVID for real personal income was 2.3 percent.  

After the impact payments had been sent out to individuals, the major features of pandemic spending were the paycheck protection program and enhanced unemployment compensation.  In April 2021, these programs were running at combined annualized rates of $763 billion, but by January 2022 all of the major programs were rapidly winding down and had largely ended. 

How does spending continue at high rates? We know that the strength of the roughly 70 percent of the economy driven by consumers has been central to the strength of the overall economy.  Fed rate hikes have slowed manufacturing and wholesale trade and most interest-sensitive sectors like housing.  But for much of 2022-23, Fortress Consumer seemed impregnable with sustained strength in jobs and spending.  

The on-going decline of Fortress Consumer was already illustrated in Figure 3 with the slow but steady fall in US employment growth as it returned to trend levels.  Figure 4 just showed us that personal income adjusted for inflation is also now running well below pre-COVID trends. Figure 5 below perhaps does a better job of illustrating this on-going weakness in household income.  Fiscal stimulus kept real personal income well above long-term trends through 2021 and until April 2022, when income fell below trend to stay.  Real income sagged badly through early 2022, then attempted a recovery through May of 2023 before essentially stalling out in recent months. 

Figure 5

Real and nominal US retail sales since December 2020 are shown in Figure 6.  The second and third round of stimulus arrived in late 2020 and early 2021, and real retail sales surged 10.3 percent between December 2020 and the following April.  While the inflation-adjusted sales probably peaked in April 2022, they now have fallen back by less than one percent, giving up a small part of the extraordinary gains from stimulus.  Meanwhile, real after-tax income briefly fell back to pre-COVID levels in July ‘22 and has since July ’23 provided income support at only the weak levels seen above.    

Figure 6

Our problem is simple: While the economic fundamentals for jobs and income continue to slowly weaken, what keeps spending high?  Can this continue?  How long can extraordinary consumer spending last?  Several factors come into play to complicate any simple answer to these questions.

  • While first rounds of stimulus was vital to protecting the US economy, much of the later rounds simply stacked up in household bank accounts as liquid assets that allowed households to continue spending freely even after stimulus slowed. (Figure 6)  Although monetary policy slowed interest-sensitive sectors such as new and existing housing, commercial real estate, manufacturing, and wholesale trade, the 70 percent or so of the economy made up by the consumer continued to be resilient.
  • The simplistic short-cut to understanding how COVID stimulus has lingered is simply to look at the measure of “excess savings” in Figure 7.  The left side shows the share of income that is saved above normal spending and after taxes are paid.  From 1960 to early 2020 the savings rate averaged 8.5 percent, with the broken blue line being the dividing line between savings running higher or lower than normal.   

Figure 7

  • American consumers are well-known for being free spenders, but even US consumers could not keep up with the three rounds of massive COVID stimulus.  Savings rates reached 32.0 percent in April 2020, 19.3 percent in January 2021, and 26.1 percent the following March.  The “excess savings” accumulated on the right side of Figure 7 as long as the savings rate was above 8.5 percent, but they were drawn down when the savings falls below that rate.
  • Savings stacked up to total $2.1 trillion by late 2021, but as COVID stimulus ended, and as savings rates fell below 8.5 percent, the consumer dipped into these funds to sustain COVID-like levels of spending.  Only late last year was the accumulation of “excess savings” finally exhausted.       
  • While the excess-savings story is a rough and stylized picture of what happened, the Federal Reserve’s report on household balance sheets provides a less timely but more complete picture.  A simple tracking of the sharp rise in highly-liquid and short-term funds in savings and checking accounts through mid-2023 tells us pre-COVID holdings were around 10 trillion dollars, they peaked at over $14 trillion, and have fallen back to only $12-13 trillion.  Even allowing for trend growth since COVID and high inflation rates, there are still probably a trillion dollars or more in new and readily available funds
  •  A complication arises, however, once we ask who holds these liquid assets.  Figure 8 shows the distribution of liquid assets by wealth cohort, with the bottom 50 percent now holding only three percent.  Given the initial stimulus payments were heavily geared to the bottom of the income distribution, these households spent the money first. 

Figure 8

  • The two wealth cohorts in the top 10% of account holders have about 75 percent of the increased liquidity.  There should be little financial stress associated with these income levels, and their bank accounts likely say more about the stock market and other potential investments than consumption.     
  • Despite paying the highest interest rates since the 1980’s at 21 percent, credit card debt has returned to an all-time high.  Financial stress again should stem from the bottom of the wealth holdings.  Overall household debt remains manageable, however, and credit cards are a relatively small share of this debt. But “manageable” depends on individual income levels, as well as a continued strong income and employment backdrop for these borrowers. 
  • Finally, it should be noted that the COVID stimulus continued at comparatively low levels through FY 2023 as another $203 billion rolled off the books.  Nor was the COVID spending the only deficit spending underway.  According to the Congressional Budget Office, the Inflation Reduction Act (IRA) – a large infrastructure bill that was passed in August 2022 -- will add $305 billion to the US fiscal deficit by 2035, and this spending is only now gaining momentum as projects are authorized. 
  • Finally, the FY 2023 fiscal deficit, helped along by COVID and the IRA, added $368 billion to the previous FY 2022 deficit of $1.7 trillion. (Figure 9) In pre-COVID FY 2019, the deficit was $984 billion.  We have gotten used to federal spending measured in trillions, but $369 billion still provided a meaningful boost to recent economic growth.  This spending has left Fed monetary policy working steadily uphill as it tries to slow the economy and inflation.    

Figure 9

The Federal Reserve Waits for the Economy to Catch Up

The recent outbreak of inflation began in earnest in early 2021. After 15 years of the Federal Reserve failing to push inflation high enough to meet its 2.0 percent price target, only 15 months later CPI inflation was peaking at 8.6 percent based on 12-month annual changes.  (Figure 10) Rising oil and food prices following Russia’s invasion of Ukraine and contributed strongly both to the CPI peak and to its fall to 3.2 percent.  On the basis of 3-month changes, the CPI was recently running between three and four percent annual rates and slowly leading the annual changes lower. 

Figure 10

For policy purposes, however, the Federal Reserve uses another measure of price change and inflation. It turns to the personal consumption expenditure (PCE) deflator from the national income accounts, with a methodology more trustworthy than the CPI.  Alan Greenspan -- and many others -- have called the CPI a “deeply flawed” measure of price change.  Further, the Fed excludes volatile oil and food prices from its price calculations because oil markets and crop failure are well out of the Fed’s control. 

Figure 11 shows the core PCE at work.  Like the CPI, for 15 years it failed to meet the two percent Fed target, and the PCE breakout and inflation peaks were timed much like the CPI. However, the Fed’s core PCE index saw prices rise to only 5.4 percent peak or 3.2 percent below the CPI peak.  While these lower prices are of little comfort to the consumer who lives with the reality of recent food and gasoline inflation, this is the measure the Fed watches closely to steer monetary policy.     

Figure 11

Until early this year, progress was slow in bringing prices down as measured by the core PCE. Based on the 12-month changes in the left side of Figure 11, prices now have fallen from the 5.2 percent peak to 2.4 percent.  And using 3-month changes (right side), the February data show a fall to an annualized rate to 2.3 percent, followed by four months of short-term readings below the two-percent target. The three month changes are not yet enough to provide any certainty inflations will stay this low, but it is a promising near-term trend that we hope continues to hold. 

We continue to get mixed reports on where inflation is expected to go from here. Inflation expectations can become self-fulfilling and can slow the disinflation process, e.g., through higher collective bargaining demands.  Consumers are always the least optimistic group, and this is reflected by the University of Michigan’s monthly survey of household price expectations.  (Figure 12) Consumers currently see prices running 3.0 percent over the next twelve months and 2.9% over the coming five to ten. The SPF sees core PCE inflation quickly falling to near two percent over the coming 12-24 months.  And by looking at the implied inflation rates from the market for Treasury inflation-protected securities (TIPS), late last year financial markets expected that over the next 5 or 10 years inflation would fall to near 2.1 percent, but have now pushed expected price increases back up to 2.3 to 2.4 percent.

Figure 12

Only the SPF holds expectations that have quickly settled into the Fed’s two percent goal -- which means consumers and markets directly question the central bank’s credibility as an inflation fighter.  Doubts about Fed resolve were already seen above in financial markets by looking at TIPS breakeven rates, as the markets continue to think that the Fed will back off and cut rates at the first sign of weakness in the economy.  The chart in Figure 13 is a market-based Atlanta Fed forecast of the Secured Overnight Finance Rate (SOFR) – just think of it as a proxy for federal funds – based on the COMEX futures market and international swaps. It is another sign of market doubts about Fed conviction.

First, note that the expectations from SOFR are for a series of rate cuts beginning in early 2024 that are roughly 25 basis points per quarter, running counter to the Fed’s public statements about how fast it will move.  Second, through 2026 the forecast policy rate remains high, ending the year near 3.55 percent.  If we combine the Fed’s internal estimates of the long-term real rate of interest at 0.7-0.9% with the market’s 3.5 percent policy rate, it implies inflation running near 2.6 percent (3.5% - 0.9% = 2.6% ) through 2026. This remains well above the Fed’s 2% target and again shows the market’s continued doubts about the Fed’s willingness to do what is necessary to meet a 2% target.    

Figure 13

Can the Fed break the back of consumer spending, slow the economy, and bring inflation down?  They certainly have the tools, and it is political will that the market questions. The Fed tried a timid campaign to restore a positive policy rate from 2016-2019, slowly raising rates from 0.5 to 2.5 percent, but then quickly cutting rates in early 2019 at the first signs of economic weakness. Then came the pandemic, the restoration of zero interest rates, and a decision to hold these rates at zero for far too long after inflation broke out.

Embarrassed by this recent record, central bank credibility, personal legacies and professional reputations are all at stake. I think the Fed is now prepared to do what is necessary to bring inflation down to its two percent target. 

The Fed has stopped its steady series of rate increases and is now watching and waiting for further progress on inflation.  The household sector is the remaining barrier to progress – income, employment, spending – and it must clearly weaken if inflation is to be definitively broken.  As we already have seen in this report, employment and income have already fallen back to at least match pre-COVID trend growth rates, while household spending continues to weaken but hold at high levels. 


The Big Picture of Houston’s COVID Recovery

There is no question that Houston’s payroll employment has produced extraordinary growth in recent years.  Its 2019 payroll employment growth was right on a typical trend pace of 59,400 or 1.7 percent. Then came the pandemic and the loss of 189,700 jobs year-over-year, the return of 163,900 in 2021, and finally another 154,000 last year.  Once pandemic-era jobs were restored to their prior peak last April, Houston moved into a new economic expansion and has since added another 205,300 jobs. 

But we need to be careful in how we interpret these extraordinary job gains.  First, cyclical recovery from a major downturn always should bring jobs back quickly, as labor and capital have been pushed to the sideline by recession. But as soon as demand returns, workers and factories are immediately available to return to work.  And COVID left many jobs to bring back. Houston’s job return has been right in line with the deep lockdown losses and post-pandemic recovery seen across the nation which, above all, simply reflects the depth of losses forced by COVID lockdowns.

Houston’s payroll employment losses and recoveries are shown in Figure 14, with a two-month lockdown decline of 363,400 jobs or 11.5 percent. This compares to 21.1 million US jobs lost or 14.4 percent.  Houston’s decline was smaller thanks to a less restrictive lockdown policy in Texas, and the stronger initial US recovery was a strong bounce back as heavier COVID sanctions were lifted.  However, for the most recent recovery phase, Houston and the US were on virtually the same track.  

Figure 14

By April 2022, Houston had added back all of the lockdown losses, plus another 205,300 jobs through this December. The net gains for Houston have averaged only 51,325 per year since 2019Q4, or a pace running slightly below trend.  Figure 14 shows a broad slowdown in recent job growth as both the US and Houston curves slowly flattened through 2023. 

Houston’s Economy Now

The Fed’s efforts to slow the US economy are having much the same effects on Houston as on the US: credit-sensitive sectors responded quickly and negatively to higher interest rates, manufacturing slipped into recession, and local wholesale trade jobs broke a strong growth trend in October 2022.  We lack timely data on personal income or consumption in Houston and other metro areas, but local spending weakened relative to the US and began to finally shed surplus COVID spending.  Local employment growth slowed steadily through 2023, following the US lead. 

Autos and housing were affected in different ways by the pandemic and responded differently.  Autos, for example, struggled through the early pandemic period to deliver product due to chip and other material shortages, choking supply chains, and making price the major outlet for surging auto demand in 2021 and early 2022.  (Figure 15) The big supply kinks have since worked out; auto sales rose through late 2022 and the early part of 2023 but are now falling and are widely expected to fall further in the coming year.   

Auto and truck prices remain high – still about 25 percent above pre-COVID levels – and prices peaked in early 2023 and have been falling slowly even if we ignore inflation. Once we recognize that inflation is up by nearly 20 percent since 2021, real prices for autos have been falling since 2021 and are up only 4.8 percent from pre-COVID levels.

Figure 15

Existing home sales were a local pandemic bubble that burst as soon as mortgage rates began to rise. (Figure 16) Existing home sales in Houston fell hard during lockdown months but recovered quickly with a check from the federal government and zero interest rates.  Housing became a major element of the 2021 financial boom. Sales in Houston rose as much as 27.4 percent above pre-pandemic levels, only to fall hard after the Fed rate hikes began.  Sales have fallen 26.5 percent below pre-COVID levels with little sign of recovery through year-end.  

Existing home prices surged from $250,400 for the typical unit to $344,100 during the boom period, or by 37.4 percent.  So far, sharply falling sales have pulled prices back by only 4.1%.  Like autos, inflation counts for a large part of the surge in home prices, and local history says prices could hang on to a big part of the remaining gains in years to come. However, such an outcome would likely mean a decade or more of small home price appreciation.  

Figure 16

For Houston and other metropolitan areas, we do not get timely data on personal income or consumption, but spending data is available and City sales tax allocations provide a good window into these spending results.  If you look back at Figure 6 on US retail sales and compare them to City of Houston sales tax collections in Figure 17, in many ways they are a mirror image of each other.  Like the US, with the 2020-21 stimulus payments we see a sharp one-time jump in City sales tax collections of 19.1 percent or $10.3 million over the two-month period following the third round of stimulus. This is equivalent to $517 million dollars monthly in City taxable sales.

We finally see emerging weakness in post-COVID spending levels.  Until early 2023, even adjusted for inflation these tax revenues yielded little ground to this one-time surge above December 2020 levels.  Like the US, Houston’s consumers relied on past high levels of liquidity to keep spending artificially high. However, unlike the US, in early 2023 local inflation-adjusted spending began to slow steadily. At year-end, City inflation-adjusted tax revenues are $4.89 million per month below the January 2023 peak or down 7.5 percent.    

Figure 17

Figure 3 earlier showed the long, slow escalator ride down for US payroll growth, and Figure 18 shows much the same chart for Houston.  While the most recent data for the US appeared to move above trend, the strong employment gains reported for Houston last year are still steadily trending down and were approaching 1.6%-1.7% or normal trend growth.  The down escalator still seems to be working for Houston.   

Figure 18


Houston Oil: Smaller, Cautious, More Stable

We have stressed in recent reports that the impact of oil on Houston’s economy is now smaller but more stable.  The fracking industry has accepted that it is a high-cost source of oil and that it can no longer rely on sustained high oil prices and rising equity values to attract investors and finance oil-field activity.  Instead, it has become a value stock committed to using 30-40 percent of operational cash flow to draw investors.  This means dollars that once went to the oil fields now go to investors, and there is substantially less oil-field activity at every oil price than would previously have been expected.

The new financial model began to be widely adopted after the Saudi-Russian “Oil War” that was concurrent with the pandemic lockdowns in March 2020. The new rules of the road are summarized in Figure 19. First, there is a commitment to investors to pay significant dividends before spending in the oil fields. Second, there is an understanding that if OPEC holds substantial spare capacity US producers will not raise production significantly.  Since 2014, OPEC used three rounds of price cuts to discipline the US oil industry and to teach producers that fracking is a high-cost source of oil.  The result was $300 billion in US fracking assets that passed through the bankruptcy courts, and a US oil industry that now watches and listens carefully to OPEC.  Most public companies have publicly committed to their investors that they will hold down production if OPEC holds spare capacity.    

Figure 19

Oil prices increased to $70/b by late 2021, drawing strength throughout the post-pandemic era from a rapidly improving global economy, stronger travel demand, and increased power generation.  OPEC first intervened again in oil markets in 2022 to cut production in the face of a weakening global economy. Since last December, there remain 1.6 million barrels per day of cuts underway within the official OPEC-10 framework, and another 2.8 million of “voluntary” from OPEC+ members plus other extra-official cuts.  Their main effect has been to keep the price of oil steadily over $70 per barrel since late 2021. (Figure 20) 

Figure 20

According to the US Energy Information Administration, OPEC holds 3.7 million barrels per day of excess capacity and they project this to rise to 4.5 million in 2024. This is more than adequate for emergency use or other near-term needs to expand crude supplies. US production remains the primary source of new global oil supplies, but higher prices have brought a tepid response from the US.  Production rose by 7.9 million b/d between 2007 to early 2020, peaked at 13.1 million with the Saudi-Russia oil war, and returned to this peak only in June 2023. Production has gone sideways since last June. (Figure 19)

The combination of a new financial model and attention to OPEC spare capacity explains why there has been no rush back to the oil fields after COVID. (Figure 21)  The rig count fell to near 760 before COVID arrived, and then rigs fell hard to an all-time low of 253 in the Saudi/Russian Oil War.  Recovery saw a return to 780 working rigs before beginning to fall yet again, and they are now down by 28 percent early this year.  Frac spreads are the more modern measure of activity in the oil fields, but they tell much the same story – well down from pre-COVID levels and 6.2 percent lower than early 2023. 

Figure 21

This decline in rigs and frac spreads has less to do with oil price than rising interest rates.  For large public companies, the new financial rules are firmly in place with strict capital discipline and investors getting paid first. These large companies are also driving big gains in productivity in fracking, holding onto rigs, and accounting for most of the recent oil production increases.

The laggards are small private companies that can’t use the new model.  Often relying on bank financing, they are now struggling with higher interest rates, lower-quality acreage, and an inability to capture the productivity gains of big competitors. They are shedding rigs, reducing drilling, and account for most current reverses. Cost escalation has stopped in the oilfields, but high cost levels remain challenging for labor and supplies. 

Oil-related employment in Houston has behaved much the same way as the rig count – slower and lower despite healthy oil prices. (Figure 21) After losing 43,000 upstream oil jobs to the 2018 credit crunch, COVID pandemic, and Saudi/Russian oil war, the return of these jobs continues at a slow pace.  Only 21,100 oil jobs are back or 49.1 percent.  If we begin counting from the end of the fracking boom in 2014, Houston has lost about 80,000 jobs in oil production, services, fabricated metal, and machinery.  Again, this slow recovery in jobs is just one more sign that this is a cautious industry – smaller and slower-growing even with several years of $70 oil.

Figure 22

Houston’s Employment Outlook

With COVID behind us, 2023 has seen economic fundamentals return to the driver’s seat as oil and the US economy take control.  While signs are emerging that the policy hangover from  fiscal and monetary stimulus is disappearing, both the US and local economy are headed to a soft landing.  Despite a surprise extra 32,800 jobs in Houston in revised data from the Texas Workforce Commission, bringing the total to a very strong 102,900, there are growing signs that local employment and consumer spending will stabilize at healthy levels. This combination of a better US backdrop and slower but steady growth in Houston should bring a return to post-COVID normality.

To pull the forecast together, we use a high, medium, and low outlook for planning purposes. (Figure 23) We use the price of oil as the vehicle to spread the outlook from low to high employment levels.  For current planning, the low oil price is set near $40 per barrel and the high at $80. The medium price is $65 per barrel or the long-run marginal cost of oil. In all cases, we use the new financial model with 30 percent of operational cash flow diverted to investors or else used to strengthen the firm’s finances. Oil prices likely remain near $70 per barrel or higher through 2024, just as they have since late 2021.  Any further projection of oil prices is highly speculative, and a return to $65 per barrel is the best guess in 2025 and after.  This smaller and slower-growing oil industry reduces our expectations for oil-field expansion and now implies slower regional growth than similar prices would have implied in the past.

Figure 23

The Survey of Professional Forecasters has steadily improved its outlook for the US economy since early 2023: for the 2023Q1 outlook, the four quarters of the year would bring an average of 42,900 new jobs each month, in the 20Q2 forecast it would be 32,500 jobs per month, 79,000 jobs in Q3 and 91,000 in Q4 . Now it is 122,600.  This compares to pre-COVID job growth expectations of about 150,000 jobs per month.  There is no US recession in the outlook, no reacceleration, and the down escalator is working.   

Figure 24 is an overview of how these economic fundamentals play out over the longer run for low, medium, high, and $100 cases. This is our forecast of Houston’s economic future through calendar year 2028.  We see the COVID lockdowns end, a long recovery to pre-pandemic employment levels and beyond, a moderate slowdown that comes in 2024 as a full year of slow growth. For Houston, the medium outlook in 2024-25 remains healthy but much slower than recent years.  Houston finally settles in to long-trend growth near 55,000 jobs.    

Figure 24

Figure 25 is this same 2023-2028 forecast of Houston’s payroll employment stated in annual changes and measured Q4 over Q4 each year. The near-term focus of the outlook in 2024 should be between the medium and high forecasts as long as oil averages between $70 and $80 per barrel -- as it has done for the last 30 months.  If oil prices continue to hold in this range, we could see between 65,000 and 75,000 jobs in 2024.  

Figure 25

Our outlook for oil prices in 2025 and beyond should move to the medium forecast to $65 per barrel.  This is not because we know where oil prices will be, but because no one can know oil prices past a few months into the future and a reversion to the mean at $65 becomes the best default assumption.

In 2025, the medium forecast lags long-term trend growth of 55,000 jobs.  Why so slow?    Artificially high levels of COVID-driven income and spending bred an artificially high number of jobs that still need to be worked off.  It points to slower job growth but with no reversal. Growth reverts to near-normal trends in 2026 and after.   

Written by:

Robert W. “Bill” Gilmer, Ph.D.

March 2024