Houston’s Energy Downdraft Persists Even with Firmer Oil Prices

The Texas economy generally, and Houston’s in particular, are feeling a persistent downdraft from the beleaguered energy sector. In March, Texas lost a net of 12,000 jobs, just the second monthly loss since late 2010. This kept the state’s unemployment rate steady at 4.3 percent, well below the national average of 5.0 percent for the month. We expect job growth to cool statewide, stepping down from a 2.4 percent annual gain in 2015, to about 1.5 percent this year. Real state GDP lost momentum in 2015Q3, the last data point available, when it barely increased at a 0.1 percent annual rate, following a weak 0.5 percent gain in 2015Q2. Over the four quarters from 2015Q4 through 2016Q3, we show a moderate decline in Texas real GDP, driven by the worst drilling conditions since the mid-1980s. Fortunately, oil prices have found some footing, increasing from the February low of $26 per barrel for West Texas Intermediate crude oil, to near $45 by late April. We expect drilling activity to stabilize by late summer as long as recent price gains are durable. However, even with some support from firming oil prices, the downdraft in the energy sector will continue well into the second half of this year, if not longer.

Job growth in Houston essentially flatlined in early 2015, allowing the metro area unemployment rate to increase from 4.35 percent in January 2015, to 4.83 percent this March. In February and March of this year we saw two consecutive net job losses. We expect that worsening trend to continue. Our Q2 forecast for the Houston metro area shows net job losses in the five quarters from 2016Q2 though 2017Q2. We expect the energy sector to continue to shed jobs through that period as companies consolidate, operations are scaled back and new investment is delayed or curtailed. Outside of the energy sector, jobs will be cut in construction and in areas that depend on discretionary consumer spending, including retail sales and restaurants. Fortunately, Houston’s strong demographic momentum has created many jobs that will likely not be cut, including education and healthcare-related employment.

To date, Houston’s downstream energy sector has been a key support to the area’s economy as the upstream operations were cut back. Going forward there will be less support as large construction projects are completed in 2017. Also, rising oil prices will start to squeeze margins for refiners, reducing their profitability. We expect the Houston metro area economy to stabilize by the second half of 2017. Beyond 2017, we forecast Houston to return to only moderate job and income growth.

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Click here for the complete Houston Regional Economic Update: Houston 2016Q2.

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