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FOR IMMEDIATE RELEASE
November 16, 2006

Contact: Angie Joe
713.743.8153 (office)
713.617.7138 (pager)
ajoe@uh.edu

HOUSTON, November 16, 2006 – The long predicted national economic slowdown and housing market correction have finally arrived, said Barton Smith, University of Houston professor of economics, during his bi-annual symposium.

During “Facing the Economic Challenges of the 21st Century,” Smith analyzed recent economic trends, concluding that while the likelihood of a national recession is remote, the housing market correction is far from over.

The only questions that remain are how severe housing market correction will get and how long it will last. Data on this score are inconsistent. Consequently, some Wall Street pundits are fretting over a recession, while others are convinced that there will be a soft landing similar to what occurred in 1995-96.

“Next year,” he said, “will be one of slow economic growth and continued weakness in home sales and home prices. The severity of the home market correction will be ameliorated to some degree by low fixed rate mortgage interest rates and by reduced pressures from the extraordinarily high energy prices of last winter and spring. Still, home buyers now recognize that prices are too high and will remain unwilling to buy homes for either consumption or investment purposes without further price reductions from sellers. The impact of continued declines in new home construction will keep the national economy subdued through most of 2007.”

In Houston, the economic slowdown, though present, is much less obvious, Smith pointed out. The regional upstream energy sectors related to oil and natural gas exploration remain strong so far. Growth in the city’s non-energy economic base is slipping in tandem with the national slowdown, as many of the region’s large secondary sectors have become stagnant in anticipation of a slow spillover of the national economic malaise to the local economy. Nonetheless, after the 2006 data are finally fully benchmarked in a few months, overall job growth for the year should end up close to 3.5 percent or about 75,000 jobs.

“Two threats cloud next year’s picture for Houston,” Smith warned. “It is highly likely that the city will not receive as strong a stimulus from energy in 2007 as in 2005 and 2006. While energy prices may remain within the current trading range, if they do so only because of OPEC cuts in production, the incentives for energy interests to spend billions of dollars exploring for oil and gas will be greatly diminished. Right now inventories of all major raw and produced energy products are high. In the absence of a cold winter, there will be mounting downward pressure on energy prices without OPEC intervention. If exploration slows down or even merely stabilizes at current levels, Houston will lose much of the benefits of upstream energy job growth that has set it apart from the rest of the nation.”

The second cloud on Houston’s horizon is the likelihood that the local hot housing market will cool.

“While the effects of the national housing market correction will be modest in Houston, there must eventually be a slowdown here as well,” Smith predicted. “We are simply building homes at a pace that is faster that can be absorbed, given the rate of growth of population in the region. This doesn’t mean that new home construction will collapse in Houston as it has in some parts of the country, merely that the current pace can’t be sustained. Thus, growth in construction employment is also likely to come to an end for a while as well.”

Smith said that even with the strong growth in jobs in upstream energy and construction, overall employment gains in Houston are going to be much more subdued than in the recent past.

“Job growth is likely to slow to around 2 percent per year for the next couple of years until the housing market stabilizes and the national economy begins to regain some steam,” he said. “When that happens local job growth will slowly head back up toward 3 percent per year, but will be more evenly balanced towards the end of this decade between energy and non-energy.”

Smith also discussed several serious long-term threats to American prosperity over the next two decades.

His presentation focused on the negative impacts of the growing U.S. dependency upon foreign energy, of worsening social unrest throughout much of the world, and of the critical state of national savings that will prove particularly burdensome as the baby boomers soon flood the pool of retirees.

FOREIGN ENERGY – The U.S. cannot have energy independence and cheap energy.

“Alterative energy sources will become available only at high costs,” he said. “That means we will have to learn to live with the equivalent of this spring’s high gasoline prices and electricity prices. Were they to fall much from current levels, we’d all find Middle East oil a much better bargain than any of the possible alternatives.”

GLOBAL SOCIAL UNREST – Current trends are counterproductive to world prosperity, but globalization as we have come to know it in the past 15 years has done little to bridge the income gap between rich and poor nations or between rich and poor within nations.

“In nations where less than 50 percent of the population has gained from globalization, there will be continued pressure for regime change,” he said. “The leftist movements of late in Latin America are a good example of the frustration of large portions of the population in developing countries from a lack of economic progress. Unfortunately, social and political revolutions usually come at the sacrifice of democracy.

NATIONAL SAVINGS CRISIS – Few commentators or politicians are talking about the savings problem.

“Some focus on limited issues such as the large federal government deficit or the fact that Americans have been building up a huge amount of debt,” he said. “The national savings rate is actually negative this year. As a nation, we are spending more than we earn.”

Smith pointed out that this phenomenon has direct relevance to our nation’s current trade deficit and the quickly approaching Social Security predicament.

“There is a tendency to treat the Social Security ‘crisis’ as a pure accounting problem, but it ultimately stems from the fact that American’s haven’t been saving enough for the winter of their lives,” he said. “The burden on the rising generation will be alarmingly heavy in supporting the large retiree population of the future.”

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