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Institute for Regional Forecasting Looks at Houston’s Bumper Car EconomicsRecovery Under Way Despite Record Federal Deficit, Borrowing and Rising Interest Rates

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May 24, 2011-Houston-

During the Institute for Regional Forecasting's biannual economic and real estate forecast, Ted C. Jones, chief economist for Stewart Title Co., addressed issues and questions regarding the future of the national and local economies.   From his perspective, the U.S. is finally out of the recession, but still not hitting on all cylinders.  Of the 421 divisions and Metropolitan Statistical Areas (MSAs), 266 showed a gain in jobs in the prior 12 months, while 146 had declines. 

Ted Jones

The presentation, "Bumper Car Economics - You Think You Know Where You are Going But Things Keep Bumping Into You, a Real Estate and Economic Forecast," provided the newest economic statistics on the global, national and local economies.

 "Jobs are everything to an economy and the good news is that most of the country is finally getting bumped forward instead of backward," he said.  Houston's job growth rate for the 12 months ending in April was 2.1 percent, double that of the 1.0 percent in the U.S.  This level of accelerated performance was felt across the Lone Star state with Texas accounting for 19.3 percent of all new jobs created in the country in the past 12 months - yet, the state makes up just 8.1 percent of all jobs.  Only the Dallas-Fort Worth region has gained more jobs than the Houston area in the past year.  The national economy is still down 7.1 million jobs since January 2008, which, at the current job growth rate, will take almost three years to replace.  The Houston economy is down less than 40,000 from the peak, which at the current growth rate would be achieved in the next two to three months.

Jones predicts oil prices in the $120 to $140 range by 2013 to 2014, and $5 per gallon gasoline in the next 36 to 48 months.  While these greater energy costs will bump back the overall U.S. economic growth rate, it will treat Houston differently.  Contrary to past energy price eruptions in the U.S., this increase is not comparable as the jump in prices has been partitioned to the oil side with natural gas prices remaining relatively static thanks to the development and perfection of hydraulic fracturing of shale formations for natural gas production.  While oil prices have essentially risen by a factor of five since the mid 1980s in the U.S., the price for natural gas has merely doubled.  As natural gas is the primary feedstock for the petrochemical industry, the region now looks to gain new capital investment, plants and jobs versus an off shoring exodus seen in past energy rises.  Significant growth will span from chemicals to plastics.   One-half of the petrochemical industry jobs in Texas are in the Houston region, with a potential --given the new natural gas production techniques - of almost 10,000 new jobs in Houston. 

 "Just like driving a bumper car, never assume that something will not change your course or trajectory to your destination -even in the economy," Jones said.  "Technology changes the entire strategy and game plan--look at directional drilling as an example.  Given the affordability of natural gas compared to oil, drilling rigs searching for oil now make up one-half of all operating rigs, up from less than one-in-seven rigs just five years ago."

Jones reiterated that deficit spending at a national level is not sustainable.  The U.S. remains on a path (foregoing any bumps) of doubling  the $10.7 trillion of national debt (excluding Social Security, Medicare and Medicaid commitments) by 2020-and that assumes that there are no new net Federal spending programs, that health care is essentially revenue neutral and that interest rates do not rise.  Insolvency looms for Medicare as early as 2024 (which now provides coverage to 47 million Americans), while Social Security is estimated to be insolvent as early as 2036.   And that's not even the tip of the iceberg.  Last year the reported unfunded net present value (NPV) of Social Security and Medicare was an estimated $28.5 trillion-double the current national debt. 

Can the U.S. Government and the Federal Reserve remove the life support systems that the economy has been on since late 2008 without further weakening the patient?  Jones believes they can, but the economy needs a good forward momentum.  Even more complicated, what will rising energy costs do to bump back the recovery in many markets?  That answer depends on which side of the energy equation you reside.  At least in Houston, while rising energy prices hurt some individual households, over all, the aggregate economy grows at an even greater rate. 

The stalemate in Congress discussed in last year's presentation from the election results remains in place, thus far showing only bandages being applied by the elected leadership of the House and Senate rather than economic surgery. 

While the dream and goal of green and renewable energy seem attractive, the economics of realizing that dream without dramatically impacting the course of the economy or with the discovery and application of new technologies are minimal.  While President Obama has stated a goal of 80 percent green energy by 2035, to do so would require a structural change in the energy industry.  To replace 10 percent of the energy now obtained from coal, oil and natural gas would require a doubling in the number of nuclear-based power plants from the current 104 to more than 200.  And there still is no economically viable energy storage technology that would compete with conventional energy prices. 

 "Houston's commercial real estate is performing well," Jones added.  "More jobs immediately equate into increased retail spending. The latest year-over-year statistic in retail sales shows a gain of 6.6 percent.  Effective rents for apartments continue to rise as the new lending standards exclude a larger percentage of potential home buyers." 

The Port Authority of Houston reports continued gains in shipping that fall directly to the bottom line economically speaking in the Houston region.   At the current pace, the Port will handle 1.5 million filled containers between exports and imports (with exports making up more than 63 percent of the total-and that's great news for the American economy).

The IRF forecasts include several predictions:

  • While the U.S. recovery is finally tracking along, albeit at the slowest improvement pace seen since the 1930s, there are several bumper car impacts looming in the future including energy costs, a probable tax increase to help buffer deficits and the pending departure from the massive stimulus of the Federal government and the Federal Reserve when money supply will contract and interest rates rise.
  • Houston will likely add a minimum 52,000 jobs when comparing January 2011 to year end.
  • As the global and national economic recovery progress, so will the upward trend resume in oil prices. And as global uncertainty issues decline, expect interest rates to rise as investors globally depart from the U.S. Dollar and U.S. Treasury instruments (which they entered as a flight to quality) and reverse that in a flight to yields.
  • Interest rates will escalate in 2011, driven by a declining value of the U.S. dollar, increasing cost of oil, a growing global economy and the hangover effects of a cheap money policy.
  • Consumer confidence continues to rise-shown vividly by an increase from sub-10-million new vehicle sales per year to the now 13 million on the way back to what was a normal 16 million vehicles.
  • In terms of the housing market, Houston new home sales will be helped by an improving tone to the local economy and rising rents, but will be hurt by increasing interest rates. Good news is that Houston homeowners need not be overly worried because Houston prices will remain relatively static (with Houston being one of the better housing markets in the country in 2011 and 2012). Homebuilders can now look forward to increased demand for new housing, given production of less than 25,000 new dwelling units in the prior 12 months and more than 50,000 new jobs in the same period.

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