"Waiting on the Oil Markets: Houston's Economy Seeks Direction"
NOVEMBER 11, 2016
Robert W. Gilmer, Ph.D.
Director of the Institute for Regional Forecasting, C.T. Bauer College of Business, University of Houston and former Vice President, Federal Reserve Bank of Dallas.
November 10, 2016, Luncheon Seminar at the Imperial Ballroom, Hyatt Regency Hotel
Summary: Although greatly diversified compared to decades ago, Houston's economy is still driven to a large degree by two factors, namely the health of the national economy and the energy industry. The national economy continues to move forward steadily. So, the question becomes "is the oil bust really over and how will we move forward?" Major oil-field service companies indicate that the bottom (Q1 2016) has indeed passed, although indications are that rig counts will not return to prior levels. Goldman Sachs puts oil at $65 for the mid-term, too low for many producers to be profitable. As a result of the downturn in the oil industry, Houston has been in the mildest of recessions (if it is a recession at all), but it has already passed and we are moving forward. While 2015 squeaked out growth of 6,000 new jobs, 2016 is currently at a loss of -800 jobs and will likely post a loss of about -22,000 jobs. Job growth is forecasted to be around 4,500 new jobs in 2017 will show small growth of 4,500 new jobs and then returning to 70,000 to 80,000 new jobs in 2018 and 2019.
- U.S. economy continues to grow, despite oil, helping Houston's employers that generate products that move into the national market.
- The oil downturn may have been the worst ever for the U.S. oil industry, likely bottoming out in Q1 2016 with a total loss of -80,000 jobs since late 2014.
- It takes two quarters for rig counts to begin to go back up after bottom.
- It takes two quarters from an increase in rig counts for Houston employment to begin to rise.
- While there is a current over supply of oil, over the long term demand for oil has grown steadily.
- U.S. shale production of oil reversed 40 years of declining U.S. oil production.
- Most demand for oil comes from emerging markets (e.g., China, India, Brazil), for which demand has slowed recently.
- While we have seen some recovery in rig counts and drilling, it may take $65 oil for real recovery to occur. Goldman Sachs also indicates $65 for real recovery.
- Is the recent set of increases in rig counts a real return of drilling, or just a dead cat bounce? Time will tell, but oilfield service companies such as Baker Hughes, Schlumberger, and Halliburton indicate that the bottom has come and passed, althought offshore oil will not come back for a long time.
- This oil downturn marked the end of a decade of exceptional economic growth in Houston.
- Job growth remained positive in 2015, likely posting 6,000 new jobs after revision; 2016 is currently at a loss of -800 jobs.
- Job growth came largely from the service sector, including food, health care, retail trade, entertainment, restaurants, and bars.
- The service sector continues to grow, but there is some concern as there are only so many bars and restaurants that can be sustained.
- Houston's unemployment rate moved above the U.S. average to 5.4%.
- Both Dallas Fed Business Cycle Index and Purchasing Managers' Index indicate we were in and/or have now moved out of mild recession.
- Forecasts for Houston's recovery are based on three scenarios of future rig counts:
- High rig count: max return to 1,650 rigs, beginning strongly in Q4 2016.
- Medium rig count: max return to 1,500 rigs, beginning strongly in Q1/Q2 2017.
- Low rig count: max return to 1,300 rigs, beginning strongly in Q3/Q4 2017.
- Under a weighted 30/60/10% probability of these three scenarios, job growth would see a loss of -22,000 jobs in 2016, but then swing back to positive job growth of 4,500 new jobs in 2017, 74,800 new jobs in 2018, and 85,100 jobs in 2019.
- This is an improvement over past forecasts, which suggested a continued loss of jobs of -30,000 in 2017.