In the far-flung oil and gas industry, all those roads that eventually lead to Houston are getting bumpy.
City leaders validly boast about diversification of the Houston economy. But when oil and gas markets sour, Houston still puckers. It might be in recession.
"It's a close call," says Jesse Thompson, a business economist at the Federal Reserve Bank of Dallas, Houston branch.
In the Dallas Fed's quarterly publication Southwest Economy, Thompson reports that the Houston Business Cycle Index indicates the Houston economy contracted in the second quarter last year, returned briefly to growth, then retreated again.
The index is broad and timely, reflecting employment, unemployment, real retail sales, and wages. Data revisions delay an official judgment about recession.
Signs aren't good.
"While Houston overall managed to tread water in 2015," Thompson writes, "this year may prove a greater challenge with several forecasts of continuing contraction."
Employment mixed
In employment, economic diversification masks the crush everyone in the oil and gas industry knows has occurred.
Between December 2014 and March 2016, Houston job losses overall totaled only 718. But the manufacturing category was down more than 31,000 jobs, mining nearly 20,000, and professional and business services more than 8,000.
Big gains came in leisure and hospitality, nearly 21,000 jobs; health, more than 16,000; retail, more than 12,000; and state and local government, more than 10,000.
According to Thompson, "core energy-related industries"-including oil and gas extraction, support activities for mining, certain types of manufacturing, and selected scientific and technical services-shed 55,000 jobs.
Capital expenditures for goods essential to the oil and gas supply chain, such as equipment, pipe, chemicals, and software, especially affect Houston's manufacturing and scientific and technical industries.
"Nationally," Thompson writes, "those purchases are projected to fall roughly 40% in 2016 after a similarly large decline in 2015 as firms attempt to retain cash and outlast low oil and gas prices."
The economist cites a Haynes & Boone estimate that of 81 bankruptcies of oil and gas companies last year, 12 were filed in the federal court district encompassing Houston. In the first quarter this year, seven oil and gas bankruptcies were filed in the district out of 27 nationwide.
In another type of diversification, Houston's world-scale refining and petrochemicals industries help offset upstream contraction.
Of construction worth an estimated $164 billion in 266 new chemical and related projects across the industry, about one third is planned in or near Houston. That work accounted for many of the 5,500 construction jobs added in Houston from December 2014 to October 2015, according to Thompson. Commercial and residential real estate augmented the increase.
Construction cuts since last October, however, have all but erased those gains.
Most chemical projects are to be completed between the second half of this year and 2018. Some will continue until 2021. Some will be cancelled or delayed.
"As the first round of new Houston-area plants is completed later this year and in 2017, blocks of construction jobs will disappear," Thompson predicts.
Predictably, commercial office and residential real estate indicators are sagging. Commercial office space under construction has begun to fall, and concessions are increasing for office and apartment rents.
Construction starts for single-family houses fell 10% in the first quarter of the year.
While industries other than upstream oil and gas remain buoyant, the balance of forces is downward for Houston. The unemployment rate rose from 4.3% in December 2014 to 5% in March 2016, while the labor force continued to grow, although at a diminishing pace.
"With Houston's core energy-related industries still hemorrhaging jobs, construction activity beginning to decline, and layoffs suppressing demand for goods and services, Houston's economy will likely weaken further this year," Thompson writes. The $50/bbl threshold
Gloomy? Yes.But a year and a half ago, crude at $50/bbl panicked Houstonians whose livelihoods depend on upstream oil and gas.
Now it makes them smile-or at least not frown so much.
Bob Tippee | Editor
Bob Tippee has been chief editor of Oil & Gas Journal since January 1999 and a member of the Journal staff since October 1977. Before joining the magazine, he worked as a reporter at the Tulsa World and served for four years as an officer in the US Air Force. A native of St. Louis, he holds a degree in journalism from the University of Tulsa.
