Houston and the US Recovery: Last In, First Out?

1. Houston and the US Recovery: Last In, First Out? Robert W. Gilmer Vice President and Senior Economist Federal Reserve Bank of Dallas November 2010

2. Percent Change in Houston Employment, 1996-2010 Note: December to December changes, except 2010 which is year-to-date

3. Houston Employment Moving Toward Recovery, On Same Track as US Economy(3-month percent change at annual rates)

4. Houston Business Cycle Index Peaked in November 2008, Fell Only 2.0 Percent

5. Houston’s Recession Less Deep Than Other Texas Cities

6. Purchasing Managers’ IndexUS and Houston Compared

7. Unemployment RateHouston vs. US, SA

8. Why Isn’t Houston Doing Better? • Reorientation and future of space program • Continental airlines merger • Continued reductions at HP Compaq • Healthcare reform and future of the Texas Medical Center • Deepwater drilling moratorium • Cap and trade proposals

9. External Forces that Drive the Houston Economy • US Economy • Global Economic Conditions • Oil and Natural Gas Markets

10. US Recovery Is Sluggish

11. Overall Coincident Index Hit Bottom in June 2009, Recovery Is Slow

12. Why fears of a double-dip? • Slow growth exposed as the inventory cycle ended • Sudden weakness in the housing market in recent months • All eyes on Europe and worries about another financial crisis

14. Paradox of This Recovery Is Behavior of Employment vs. GDP

15. Year over year changes*: New starts -14.4 % New home sales -21.5% Existing home sales -20.8% Existing home median price -2.4% *12-month change Sep 2009 to Sep 2010

17. Existing U.S. Home Sales Stabilized in 2008, Improved in 2009, No Progress in 2010 (million units)

18. After Turn Up, New Single-Family Construction Begins to Slow Again

19. Houston Association of Realtors.

20. Source: Census and TAMU Real Estate Center

22. Impact of the European Debt Crisis(Percent Change) Estimates of the Bank of Canada, Monetary Policy Report (July 22, 2010)

24. The global economy drove the commodity boom … the bust … and now the recovery?

25. Oil Part of a Wider Commodity Boom

26. What Was Behind the Commodity Boom? Primarily, it is the growth of the developing world. From 2002-2007, the IMF estimates they account for 90% of the growth in consumption of oil, 90% of metals’ growth, and 80% of food. Dollar depreciation raises the purchasing power of other currencies, and stimulates the demand for commodities priced in dollars. Raises the price to US consumers. Low U.S. interest rates (other things equal) can raise the price of commodities by lowering the price of storage, encouraging speculation.

27. Global Growth Slows in 2008, Falls Into Recession in 2009, Back on Track by 2010 %/yr

28. Throughout the last decade, the developing world outperformed by wide margin %/yr

29. Multi-Speed Recovery Is Led By the Developing World Consensus Economics, September 2010

30. Could Emerging Country Growth Really Decouple from the US, Europe and Japan? Strong internal growth dynamics A rising share of the global economy More resilient policy framework But spillovers from the developed world still a factor – accounting for maybe 35 percent of growth for emerging economies, 45 percent for more commodity dependent

31. The World Is Doing Better than You Think: Forecast Growth Rates Consensus Economics, September 2010

32. Refiners’ Acquisition Cost of Crude Oil 1994 to Present

33. World oil demand staggered under global recession, recovers in 2010(million barrels per day)

34. Recovery in Oil Demand Led By Asia and the Developing World in 2010(change in million barrels per day) Source: International Energy Agency

35. International Rig Count Continues to Hold Up Excludes Iran and the Sudan

36. Wellhead Price of Natural Gas1994 to Present

38. Natural Gas-Directed Drilling • Demand is still weak. Industrial loads hurt by recession, still down by one-third over last 24 months • Natural gas marketed production still up 5.5 percent over the last 24 months. Drilling increasingly directed to oil, not natural gas. • Inventories remain above normal despite a lot of help from weather-driven demand. • Shale more prolific than expected, technology continues to improve. • Longer-run, will we need 1600 gas-directed rigs to maintain current level of production? Probably not

39. High Oil/Low Gas Price Push Drilling Toward Oil-Directed Activity

40. Horizontal Drilling Grows with Shale Gas, Complex Oil Projects

41. Natural Gas Inventories 10% Above Normal Going Into Heating Season

42. Oil and Natural Gas Mining Jobs in Houston: 1990 to Present

43. Houston Now Shows Growth in Both Producer and Oil Service Jobs

44. Manufacturing Jobs in Houston1990 to Present

45. What does it mean for Houston?

46. The Gulf Coast Reached the End of a Long Chain of Events • Slow growth turns to recession and financial crisis in the US economy, and a slowdown in the developing world turns to global recession • A sharp reverse in the commodity boom, and especially in oil markets means a setback in Houston and the Gulf Coast in 2009. • We have gotten help from commodity markets that should have moved local growth back in front of the US growth rate • If that has not happened, it is because of the many policy and other uncertainties that hang over the regional economy – space, drilling moratorium, cap and trade, healthcare, airline mergers, etc

47. Houston Employment Moving Toward Recovery, On Same Track as US Economy(3-month percent change at annual rates)

48. Houston and the US Recovery: Last In, First Out? Robert W. Gilmer Vice President and Senior Economist Federal Reserve Bank of Dallas November 2010