Institute For Regional Forecasting
Houston Job Growth Slows at Mid-Year,
More Moderate Growth Ahead
September 27, 2013
Houston’s payroll job growth began to cool over the spring and summer, and has taken a step down from the rapid pace of 2012 and early 2013. Thanks to a very strong start to the year, year-to-date job growth through August is 2.8 percent; but the last six months have seen Houston’s growth slip to seasonally-adjusted annual rates near two percent. (Figure 1) The monthly employment changes reported by the Workforce Commission have swung widely, and the month-to-month revisions have been large, indicating difficulty in estimating recent job growth. The final revisions to the payroll employment data, which will come early next year, may be larger than usual.
Apart from the payroll data, a variety of other sources point to a cooling off of the Houston economy. The seasonally-adjusted unemployment rate has been flat near 6 percent all year; the Houston Purchasing Managers’ Index has fallen to levels similar to the U.S. in recent months; the weekly hours worked in Houston’s manufacturing sector were 49 hours per week a year ago, but 45 hours today. None of this is fatal to Houston’s economic outlook, but combined they point to a definite ratcheting down in the pace of Houston’s economic expansion.
The torrid pace of last year, 4 percent job growth and over 100,000 new payroll jobs, was probably not sustainable under the best circumstances, but certainly not when some of the fundamentals have moved against the local expansion. Houston’s economy depends on its ties to the U.S. economy, to oil and natural gas, and to global markets, and all three are less robust than a year ago.
The U.S. Outlook
The U.S. economy has provided little support to Houston since the end of the Great Recession. U.S. GDP growth has averaged only 2.2 percent, well below the long-term trend, and especially slow during a period of recovery from deep recession. Job growth has also disappointed, with current employment still 2 million jobs short of the prior peak in late 2007.
The good news is that the U.S. economy is finally showing signs of putting the financial crisis and recession behind it, perhaps ready to return to its long-term growth trend near 3 percent. The three areas of maximum damage sustained during the financial crisis were new home construction, personal consumption, and state and local government, and they have combined to slow growth since recovery began. The heart of the crisis was housing, and new single-family home construction fell by close to 80 percent. (Figure 2) The U.S. consumer was left seriously over-burdened by debt, much of it mortgage debt, and consumption suffered as they worked down this debt load. State and local governments were hurt by the decline in sales tax revenues as consumption fell, and by the loss of property taxes, and home values declined.
All three sectors are nearing the point where we can declare the financial crisis over and the damage finally repaired. The U.S. consumer, for example, has worked off much of the debt load incurred during the housing boom, and debt-to-income ratios are rapidly moving toward pre-crisis levels. This offers the opportunity for much freer spending on housing, autos, and general retail.
Also, the housing market made a definitive turn upward in the summer of 2012, with home prices rising across the country. Along with these price increases, the prospect of higher interest rates pushed many reluctant home buyers off the fence, and sales of new and existing homes began to rise quickly. New single-family permits are still only running at annual rates of 600,000, well short of the 1.0–1.2 million that would be considered normal, but new home construction is rising and adding to GDP again.
Finally, state and local government revenues were hurt twice over. The decline in consumption slowed sales tax collection; then the decline in home prices hurt property tax revenues. A combination of budget cuts and rising revenues have now returned most states to a balanced budget, while the prospect of improved consumer spending and rising property values can only enhance the outlook.
With crisis-related damage healed, most forecasts for U.S. economic growth have turned quite optimistic, with expectations growing for a return soon to historic long-term growth rates of 3.0 percent or higher. The bad news is that we are not quite there yet. Stronger growth has been delayed by $200 billion dollars in new federal tax revenues from payrolls, to fund the Affordable Care Act, and from expired tax cuts. Add to this fiscal drag another $85 billion in federal spending cuts. Real GDP growth in 2013 is again forecast to be 2 percent or less, adding yet another year of muddling through for the U.S. economy. But a variety of forecasters ranging from the Survey of Professional Forecasters to Goldman Sachs now see strong growth in 2014 and beyond, rising to a steady 3 percent GDP growth and staying there for the long-term.
Oil and Natural Gas
For the last decade, Houston has found itself at the heart of the greatest oil and natural gas boom in U.S. economic history, led primarily by drilling for oil and gas in shale. Capital expenditures for exploration and production (E&P) reached $279 billion in 2012, increasing by a factor of six in a decade. Even allowing for inflation, the 2012 expenditures were 4 times those of 1982, the point at which the great oil bust of the 1980’s began. (Figure 3) These E&P expenditures peaked in 2011, however, they were down about 10 percent in 2012, and are expected to be flat in 2013 compared to last year. The Baker Hughes rig count – a short-term indicator of the drilling cycle – tells much the same story as the expenditure data. The collapse in natural gas prices in 2011 led to a 13 percent decline in the rig count in 2012, and it has been flat through 2013. Drilling activity continues at a very high level, but is no longer growing, pushing the boundaries of the Houston economy and stimulating growth.
The outlook for a near-term pick-up in E&P spending is not strong. Our forecast is for very modest increases in the rig count through 2014, picking up in 2015 and beyond. These increases will be driven by stronger demand for natural gas due to faster U.S. growth, exports of liquefied natural gas, and the start-up of a series of petrochemical plants built to capitalize on low prices for natural gas liquids.
There is a built-in cushion against this upstream slowdown. Oil-directed drilling remains very profitable and stable; there is much midstream pipeline and processing infrastructure necessary to connect new shale plays to the Gulf Coast; and low natural gas prices have kicked off a boom in downstream petrochemical construction. The major risk to the near-term future would be a decline in the price of oil, with 80 percent of drilling – both domestic and abroad – now directed to oil.
The Global Economy
For the last decade, the global economy has been driven by China, India, Brazil, and other emerging markets. Houston has achieved a high growth rate through its ability to reach past a sluggish U.S. economy and to tap into the growth of these developing nations. This was done in part by exporting local products – crude oil, refined products, machinery, and petrochemicals – to these high-growth countries. In 2012, Houston passed New York to become the number one merchandise exporter among U.S. metropolitan areas. Perhaps more important, the growth of these emerging economies was responsible for very large increases in the price of oil, metals, agricultural products and food. Oil rose further and faster than other commodities, with all the increases in global oil demand over the last 10 years stemming from emerging markets. Houston has been a substantial beneficiary of these high oil prices.
Recent growth in Brazil, China, and India has slowed. (Table 1) After a decade of double-digit increases, China’s growth in 2012 fell to 7.8 percent, as the Chinese attempt a risky transition from an export-led economy to one driven by domestic demand. India saw growth slow from 7.7 percent in 2011 to 4.0 percent in 2012, with few signs of a pick-up in 2013. Brazil’s growth in 2012 fell to less than one percent.
This emerging-market slowdown is one more of the fundamentals of the Houston economy that is less robust than a year ago. And they pose risks going forward, perhaps now more than usual because of the slower pace of growth. Certainly some event, like the financial crisis that swept through emerging markets in 1997, would collapse the price of oil and threaten Houston’s near-term growth. Over the longer-term, the greatest risk would be the inability of emerging markets to sustain the high growth rates of recent years. There is a long history of developing nations that grow strongly, reach a mid-life crisis, and then require major legal, financial, energy, or labor reforms to continue their strong growth. Unable to make these reforms, they simply slow to a pedestrian pace. For Houston, it would mean the loss of exports and perhaps the loss of the major prop for the price of oil.
Outlook for Houston
The economic backdrop for Houston is changing. Energy and global expansion have stepped back as sources of growth, even as they continue to operate at very high levels. Meanwhile, as early as next year the U.S. economy should take a much bigger role in Houston’s economic expansion. Table 2 summarizes our current outlook for Houston through 2017, with local job growth falling to 73,700 this year, and 65,100 in 2014. The base case depends on a return to solid growth in the U.S. economy and a growing rig count by 2014. The conservative forecast assumes a less robust turn upward in U.S. GDP, with growth remaining near 2 percent.
Although the profile of the current slowdown in local economic activity is becoming clear, the future outlined in Table 2 is growing murky again. History tells us that the official data typically are the least reliable when we need them most – at moments of change like this one. We are likely to see major revisions to the employment data for this year. The continued debt ceiling debates in Washington, the ongoing sequester of federal funds, and Federal Reserve monetary policy will also have an important bearing on near-term growth prospects for both the U.S. and for Houston. For now the forecast for Houston remains much like that made last spring, but it is an uncertain and fluid time that bears close watching.
Written by: Dr. Robert W. “Bill” Gilmer
Director, Institute for Regional Forecasting
September 27, 2013