Houston Update - June 23 2009

The Houston Economy’s Freefall.

The most recent data from the Texas Workforce Commission and the Bureau of Labor Statistics shows job losses within the Houston regional economy to be much worse than previously estimated. April’s job numbers were revised downward significantly and May’s employment statistics showed further losses. In comparison with May of 2008, employment in Houston is down 56,000 jobs. Even more startling is that since November of 2009...

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Dr. Smith dismisses the dangers of the current huge federal deficit, but warns of serious dangers ahead for failing to bring the government’s budget into balance in the future as the economy recovers. Indeed, any policy strategy that allows large federal deficits to continue will railroad any budding recover before it hardly gets started. The challenge will be bringing entitlements under control. This will stretch the courage of politicians to the limit. But it is also not likely that a balanced budget will be achievable without an increase in taxes, another unpalatable option for both politicians and their constituents.

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Dr. Smith's commentaries from November 20, 2004 through the present are now available in Adobe Acrobat format. Click here to download the file.

• Economic Indicators
• Employment
• Price Data
• Excerpts from Fall 2008 Economic Forecast Symposium
• Selected Local Economic Indicators from DATABook Houston
• The Length and Extent of Recessions

• GDP in the OECD area fell by a record 2.1% in the first quarter of 2009 05/25/2009
• Global economy is expected to shrink this year 4/22/2009
• China's economic growth slows further in 1Q  4/15/2009
• Survey finds Chinese manufacturing worsening  4/1 2009

• US Auto Sales Decline, but Show Stability 07/01/2009
• Consumer Confidence Falls in June 6/30/2009
• Savings Rate Hits 15-Year High 6/26/2009
• World Bank Cuts Global Gowth Forecast 6/22/2009
• Mortgage rates rise again 06/11/2009
• Foreclosures down slightly, but no signs of stabilization yet 06/11/2009
• Jobless rate hits 9.4 percent in May; layoffs slow 6/05/2009
• Economy Shrinks at Rapid Pace in '09 5/28/2009
• The Failure Of The Mortgage Modification System Threatens Housing 5/26/2009
• Initial Jobless Claims Drop Unexpectedly 5/26/2009
• April foreclosures rise 32 percent, with more bank reposessions likely to come 5/13/2009
• Median home prices fell in 88 percent of US metropolitan areas in first quarter of 2009 5/12/2009
• Home Prices Sink Again, but Pace Is a Bit Slower  4/28/2009
• Consumer confidence soars in April  4/28/2009
• U.S. Initial Jobless Claims Rose to 640,000 Last Week  4/23/2009
• U.S. consumer sentiment highest since September  4/17/2009
• Foreclosures up 24 percent in first quarter as temporary halts expire  4/15/2009
• Unemployment soars to 8.5 pct.; 13 million jobless  4/3/2009

Houston Area:

• Houston PMI Index Up 07/01/2009
• Oil Demand Expected to Drop Sharply 5/14/2009
• Oil and gas drilling in U.S. sinks to a 5-year low  4/15/2009

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Monthly Recap:

For the month ended May 31, 2009

May was a month of mixed news, so to speak. Internationally there was evidence that the global economy is getting worse at an accelerating pace. The same was true here in Houston. Job losses within the regional economy are unfolding much faster than was anticipated at this spring’s symposium. On the other hand, there is some evidence that the national economy is worsening too, but at a declining rate. Job losses are huge, but just not quite as bad as in past months. Consumer spending is weak, but not quite as weak as in February through April. Less bad appears to be playing quite well on Wall Street right now, but if the less bad doesn’t quickly turn into good or better, count on a stock market correction some time this summer. Already we are seeing signs of problems that could derail the hope for a recovery. Perhaps the most important are the sharp rise in long term interest rates and the new rally in commodity prices.

06/10/20009 - Oil Prices Penetrate a Key Threshold of $70 per Barrel

Oil prices have penetrated the $70 a barrel level for the first time since last October. The nearly 100% increase in prices from their lows earlier this year comes as a surprise, given that the fundamentals just don’t appear strong enough to support such levels. International demand remains weak, inventories are still far above their 7-year moving average, and other fuel prices have not seen anywhere near such a strong rebound. Natural gas prices are still trading at around $3.75/mcf.

Analysts struggling for an explanation see the rise as a function of inflationary fears and the weakness in the dollar. This may be true in an indirect sense, but it certainly isn’t an explanation of the current situation. The dollars decline is not even remotely comparable to the increase in the price of oil. Rather, it appears that the speculators are back and are betting on the future, not on current fundamentals of the market. They are feeding on the fear that the huge deficits being created in the U.S. and much of the rest of the world will eventually lead to inflationary pressures and further weakening of the dollar. Thus, expectations for the future are driving the speculative demand for commodities again, but such expectations seem to have failed to consider an alternative scenario; namely that high deficits will drive interest rates up sharply, instead of inflation, making speculation in the commodity market much less attractive. This could be particularly devastating to oil.

In the meanwhile, signs of a global economic recovery are sketchy at best, with many indicators showing that the overall global economy continues to weaken. This too will put downward pressure on oil prices, causing the speculators to head for cover. Furthermore, there are indications that some members of the Organization of Petroleum Exporting Countries may raise output with oil prices at current levels. That’s another scary prospect for oil.

So what does this mean for Houston? Will Houston’s current economic collapse soon end? Not likely. For that to occur, oil prices must continue to remain this high during the second half of this summer when industry typically reevaluates their inventories of gasoline for the remainder of the year. Second, high oil prices must finally spill over to natural gas prices, which has not yet occurred. So don’t count on some quick stabilization of the Houston economy quite yet. The story is far from over.

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