Robert W. Gilmer

English

Research Papers in Economics

HoustonBusiness
FEDERAL RESERVE BANK OF DALLAS  • HOUSTON BRANCH  • SEPTEMBER 2006
A Perspective on the Houston Economy
just mentioned. The early stages
of any economic expansion
typically are marked by easy
growth, as businesses simply
reemploy the workers and cap-
ital left idle by the previous
downturn. But as new levels of
peak activity are reached, addi-
tional employees have to be
trained and new skills develop-
ed. More factories and machin-
ery have to be added and can
only be produced on a sched-
ule of months and years. The
initial rapid pace of growth nat-
urally falls back as the expan-
sion matures. 
Although the Houston metro
area has been pushing hard to
record levels of economic activ-
ity since early 2004, it is now
facing stiff competition for jobs
and other resources from re-
gional rivals like Dallas and
Austin. In recent months, these
cities have completed their re-
covery from the 2001 technol-
ogy downturn and are now
seeking additional resources for
their own expansions to new
economic highs (Figure 1). 
The other explanation for
Houston’s slowdown could be
the slower pace of the U.S.
economy. Growth in gross
domestic product (GDP) fell
Houston Economy Eases
Off the Throttle
Houston continues to
grow strongly, but at
significantly slower
rates than a year ago.
Last year’s rapid rates
were probably
unsustainable, and
reduced growth rates
are most likely the
result of the local
economy running into
significant labor and
capacity constraints.
variety of indicators are
pointing to a slower expansion
in Houston. Employment growth,
the unemployment rate, the
Houston Purchasing Managers
Index and the Dallas Fed’s Metro
Business-Cycle Indexes all indi-
cate a slackening pace over the
first half of 2006. 
How can this be? Houston
stands at the epicenter of a
tremendous expansion in oil
and gas exploration and devel-
opment. The price of oil has
pushed above $70 per barrel in
recent weeks; the price of nat-
ural gas has been over $6 per
thousand cubic feet; the num-
ber of working rigs in the United
States has expanded by more
than 250, or 18 percent, since
last December; and shortages
of oil-related skills and equip-
ment are widely reported. 
Two possible explanations
for the slowdown are immedi-
ately evident. One is the short-
age of skills and equipment
A  from an unsustainable 5.6 per-
cent in the first quarter to only
2.9 percent in the second. The
slowdown was widespread
across sectors, perhaps affecting
that half of Houston’s economy
not tied directly to oil. 
This article is a brief descrip-
tion of Houston’s economic de-
celeration, based on a variety
of measures. We will look for
clues to the source of weaker
growth, both in its timing and
in the local economic sectors
that have led the slowdown. 
Job Growth
Table 1 contains quarterly
growth rates for employment in
Houston, using both
the establishment and
household surveys.
The first is a monthly
report on wage and
salary employment,
based on a survey of
local businesses.
1 The
second is a telephone
survey of local house-
holds, used to com-
pute the local unem-
ployment rate. 
The establish-
ment survey data in-
dicate that Houston’s
employment growth
remained healthy through the
second quarter at a 2 percent
annual rate, twice that of the
U.S. economy. However, total
employment shows a steady
deceleration since second quar-
ter 2005, when job growth was
running at an annual rate of 5.4
percent. With the exception of
one weak quarter, goods em-
ployment  has remained strong.
The first-quarter weakness was
primarily due to construction.
Manufacturing is the one goods
sector with a pattern of slow
deceleration, similar to that of
the local economy as a whole.
Oil and gas, the sector for
which the complaints of tight
labor markets and capacity
shortages are heard most often,
has continued to add jobs at a
5 percent annual rate. 
Private services, which make
up about two-thirds of Hous-
ton’s jobs, have led the slow-
down. Moderation in the pace
of job growth has been wide-
spread throughout the service
sector, finally reaching even
business and professional serv-
ices, a major contributor to
Houston’s job growth in the
past two years. Government is
a relatively small sector in
Houston and has contributed
little to overall job growth dur-
ing the past 12 months. 
The household survey for
Houston also shows the local
economy steadily pulling back
on the throttle. Job growth fell
from 5.7 percent annualized in
second quarter 2005 to 1.8 per-
cent in second quarter 2006.
Labor force growth was pushed
up dramatically by Katrina
evacuees in third quarter 2005,
as was the number of workers
unemployed. The local econ-
omy appeared to quickly re-
gain its form, however, absorb-
ing the unemployed at 20 per-
cent annual rates in the follow-
ing two quarters. In second
quarter 2006, however, the
number of unemployed work-
ers actually rose. The unemploy-
ment rate has barely changed
over the past five months, after
falling steadily in the months
following the hurricanes. 
The bottom of Table 1 shows
the GDP growth rate in recent
quarters. The stop-and-start
pattern seen here for the U.S.
bears little resemblance to the
gradual, sustained moderation
in local job growth experienced
in Houston. 
The Purchasing Managers Index
Figure 2 compares the re-
cent behavior of the U.S. and
Houston Purchasing Managers
Indexes (PMIs).
2 In these in-
2
Figure 1
Coincident Economic Activity for Texas Metro Areas
Index, January 2000 = 1
SOURCE: Federal Reserve Bank of Dallas.
.85
.9
.95
1
1.05
1.1
1.15
1.2
1.25
Houston–Sugar Land–Baytown
Dallas–Plano–Irving
Austin–Round Rock
7/06
1/06
7/05
1/05
7/03
1/03
7/02
1/02
7/01
1/01
7/00
1/00
1/04
7/04
Table 1
Employment Growth in Houston
(Quarterly percent change at annual rates)
2005:Q2 2005:Q3 2005:Q4 2006:Q1 2006:Q2
Establishment employment
Total 5.4 3.9 2.7 2.1 2.0
Goods 5.5 6.4 3.9 .6 5.7
Oil and gas 6.0 6.0 4.8 4.5 5.1
Construction 2.8 8.5 8.1 –3.0 11.3
Manufacturing 7.5 4.8 .4 2.2 1.7
Private services 5.3 3.9 2.8 2.9 1.2
Business and 
professional services 6.6 8.0 5.5 6.9 2.0
Government 5.7 .4 1.1 1.1 .5
Household employment
Employment 5.7 4.5 1.1 3.0 1.8
Labor force 2.5 7.1 0 1.4 1.8
Unemployment –.4 .6 –20.3 –22.3 1.2
U.S. GDP 3.3 4.2 1.8 5.6 2.9
NOTE: Based on quarterly average of seasonally adjusted monthly data.
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.slower growth arriving in the
second quarter. 
Further, if weakness in the
U.S. economy is being transmit-
ted to Houston, it should imply
shorter lead times and higher
inventories. Figure 4 shows that
lead times remained quite high
through July, however, and in-
ventories are stable or declin-
ing. These measures indicate
that any shortages in personnel
and capacity probably contin-
ued through the recent months
of more moderate growth. This
doesn’t look like a signal of
shrinking demand, but an in-
creasingly difficult struggle to
maintain growth at high levels. 
Conclusion
Houston continues to grow
strongly, but at significantly
slower rates than a year ago.
Last year’s rapid
rates were probably
unsustainable, and
reduced growth rates
are most likely the
result of the local
economy running
into significant labor
and capacity con-
straints. Labor short-
ages of professional
and craft workers
have been reported
for some time, and
now even entry-
level workers are
hard to find. Difficulty in lining
up construction contracts and
the high cost of these contracts,
if available, have been continu-
ing complaints. The local de-
celeration seems to be timed
differently from the current U.S.
slowdown, and U.S. weakness
does not seem to have been
transmitted to Houston, as long
lead times and low inventories
continue to be reported.
—Robert W. Gilmer
Gilmer is a vice president of the
Federal Reserve Bank of Dallas.
Notes
1 The establishment data used here are
seasonally adjusted by the Federal
Reserve Bank of Dallas and have been
given a preliminary rebenchmark that
raised local job growth from 1.8 per-
cent to 2.1 percent in the first quarter
of this year. The second quarter is still
unbenchmarked. The construction data
shown in the table contain a small
number of farm and forestry jobs. 
2 The figures for the PMI shown here
are different from those published for
Houston. First, this index is based only
on the five series used in the U.S.
index (production, employment, lead
times, finished goods inventories and
new orders or purchases), not the
seven series used in the published
Houston index. Tests indicated a need
to seasonally adjust three of the five
Houston series—production, new
orders and lead times. To produce the
overall PMI, the same weights were
applied to the five Houston series as
are used in the U.S. index.
dexes, a value of 50 or more
indicates expansion and less
than 50 indicates contraction.
The U.S. index has steadily indi-
cated expansion, moderating to
a value near 55 since the mid-
dle of last year. Houston, how-
ever, recorded month after
month of boom-time PMI values,
topping 70 in January and since
moderating to values near 60.
Although tremendous economic
strength is still present in the
local economy according to
these numbers, expansion of
new orders peaked in November,
production in January and em-
ployment in April (Figure 3).
The timing for a decline in new
orders and production seems
counter to the way the U.S.
economy would influence
Houston; the U.S. experienced
a very strong first quarter, with
3
Figure 4
Lead Times and Inventories Don’t Indicate Growing Slack 
in the Local Economy
Index
4/06
12/05
8/05
4/05
12/04
8/04
4/04
12/03
35
40
45
50
55
60
65
70
75
80
Inventories
Lead times
Figure 2
Houston and U.S. Purchasing Managers Indexes Compared
Index
Houston PMI
U.S. PMI
4/06
12/05
8/05
4/05
12/04
8/04
4/04
12/03 40
45
50
55
60
65
70
75
Figure 3
New Orders, Production and Employment All Slow This Year
Index
50
55
60
65
70
75
80
Employment
Production
New orders
6/06
4/06
2/06
12/05
10/05
8/05
6/05
4/05
2/05
12/04
10/04
8/04
6/04
4/04
2/04
12/03
SOURCES: Houston Association of Purchasing Managers; author’s calculations.
SOURCES: Houston Association of Purchasing Managers; author’s calculations.
SOURCES: Houston Association of Purchasing Managers; author’s calculations.ouston continues to
grow rapidly but has slowed
from autobahn to open high-
way speeds. Between February
and July of this year, Houston’s
12-month growth rate slipped
from 3.4 percent to 2.5 percent.
The seasonally adjusted growth
rate ticked up from 5.1 to 5.2
percent in July. The goods sec-
tors continue to lead local
growth, especially construction
and oil- and gas-related activ-
ity. Slower expansion is based
primarily in a widespread slow-
down in services.
Retail and Auto Sales
Houston retailers reported
solid results for August, after a
lackluster July. Both department
stores and furniture stores saw
a nice pickup in sales. The
annual sales tax holiday con-
tributed to these results but
becomes less important each
year in Houston. 
A 17.7 percent drop in truck
and SUV sales in July compared
with 12 months earlier pulled
overall Houston auto sales down
9.2 percent. The weak compar-
ison owes much to the extraor-
dinary incentives that were being
offered last July: employee dis-
counts for everyone.
Real Estate
Houston existing home
sales in July improved 3.3 per-
cent compared with July of last
year. New home sales are up 8
percent through the first half of
2006. Local permitting activity
fell in July, after rising 18.6
percent year-to-date through
June.
The industrial sector is the
most active real estate in Hous-
ton. Although the vacancy rate
H
and lease rates were both
unchanged in the second quar-
ter, the sector absorbed over a
million net square feet. Another
million square feet is under
construction.
Energy Prices
The price of light, sweet
crude oil was in a range of
$72–$77 per barrel, with the
high end representing all-time
high crude prices in nominal
dollars. Contributing to high
and volatile prices were strong
gasoline demand, the shut-
down of Prudhoe Bay produc-
tion, and geopolitical fears
stemming from Iraq, Iran,
North Korea, Nigeria and the
Israel–Lebanon conflict. 
Gasoline demand was up
about 2 percent from last year,
despite high pump prices.
Wholesale prices were volatile,
peaking at near $2.45 per gal-
lon following a series of refin-
ery outages, but fell back to near
$2 in late August with crude
prices easing and the end of
the driving season in sight. 
The price of natural gas
had fallen as low as $5.18 in
early July but recovered to $6
and higher on the basis of a
long-lasting heat wave. It
briefly moved to $7 and $8 per
thousand cubic feet on the
basis of tropical storm activity
that never developed. Storage
inventories continue to build
and are now at 2.8 trillion
cubic feet, or 14 percent above
normal.
HoustonBeigeBook August 2006
Refining and Petrochemicals
Most of the major petro-
chemical chains report solid
demand and good profitability.
Butadiene demand is strong.
Ethylene demand has bounced
back, with significant help from
resumed exports. High domes-
tic prices due to feedstock and
limited capacity after the hurri-
canes had pushed the U.S. out
of international markets. The
decline in natural gas prices
and the run-up in oil prices
have reopened export markets
for U.S. ethylene.
Refiners report that the
conversion from MTBE to
ethanol and to low-sulfur
diesel encountered few prob-
lems. Refiners’ margins were
strong throughout the period—
near $15 per barrel. Capacity
utilization on the Texas and
Louisiana Gulf Coast rose
above 96 percent in early
August.
Oil Services and Machinery
Oil services and machinery
continues to expand rapidly
despite recent weakness in nat-
ural gas prices. The domestic
rig count added more than 100
working rigs in six weeks, and
two-thirds were added in
Texas. The percentage of rigs
drilling for oil instead of natu-
ral gas has shifted only slightly
in favor of oil, and lower natu-
ral gas prices have given oper-
ators a little more leverage in
negotiating day rates for land
rigs. Day rates have flattened
out, but not fallen. 
For more information or copies of this publication, contact Bill Gilmer at 
(713) 483-3546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, 
Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is 
also available on the Internet at www.dallasfed.org.
The views expressed are those of the authors and do not necessarily reflect the positions
of the Federal Reserve Bank of Dallas or the Federal Reserve System.

A perspective on the Houston economy

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A perspective on the Houston economy

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