houston, like the nation, is returning to growth tim hopper senior economist federal reserve bank of...
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Houston, Like the Nation, is Returning to Growth
Tim Hopper
Senior Economist
Federal Reserve Bank of Dallas
June 15, 2004
External Forces that Drive Houston
• US Economy
• Global Economic Conditions
• Oil and Natural Gas Markets
Recession Ends in November 2001Coincident Index for US Economy
113
114
115
116
117
2000 2001 2002 2003
US GDP Growth Gains TractionAnnualized Growth Rates
-2
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003 2004
Unemployment RateHouston vs. US, SA
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
2000 2001 2002 2003 2004
Per
cent
US
Houston
-400
-300
-200
-100
0
100
200
300
400
2001 2002 2003 2004
Tho
usan
dsMonthly Job Creation/Destruction
Employment Growth in US
US Recession Ends
Corporate investment is expanding
-20
-10
0
10
20
30
40
2000 2001 2002 2003 2004
Annualized quarterly growth
Business fixed investment
Equipment & software
Information processingequipment & software
Retail sales growth continues…in Millions of dollars
270000
280000
290000
300000
310000
320000
330000
340000
2000 2001 2002 2003 2004
205000
215000
225000
235000
245000
255000
265000
Overall retail sales, left scale
Excluding autos, right scale
Why is the exchange rate important to Houston?
• Houston has the second largest port in the US (by volume) and has the 4th ranked airport system by passenger volume.
• Over 50% of foreign companies located in Texas are in Houston and nearly 60% of Texas companies with foreign operations are located in Houston.
• Generally, a 1% depreciation in the real exchange rate leads to a 1 % increase in manufacturing employment in Houston within 18 months.
Three Effects on Houston Economy
• Direct impact on exports.
• Direct impact on the US economy – indirect impact on Houston.
• Energy prices. Oil is denominated in dollars.
Trade Weighted Value of the Dollar1995 to Present
95
105
115
125
135
1995 1996 1997 1998 1999 2000 2001 2002 2003
Short Term Interest Rates in Three Economies
0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004
Per
cent
United States
United Kingdom
EuroZone
Energy and Houston
• 50% to 60% of Houston’s economy is directly or indirectly linked to energy markets.
• Upstream Exploration.
• Downstream refining and petrochemical operations.
Baker Hughes Rig CountOil vs. Gas Directed Drilling
0
200
400
600
800
1000
1200
1400
1990 1992 1994 1996 1998 2000 2002 2004
Wor
king
Rig
s
Gas Directed Oil Directed
Ethylene MarginsCash Margins (cents/pound), Ethane
2
4
6
8
10
12
14
1997 1998 1999 2000 2001 2002 2003
Job Growth over Three Month IncrementsHouston vs. US
-3%
-2%
-1%
0%
1%
2%
3%
4%
2000 2001 2002 2003
US
Houston
Houston’s Employment Forecast
1500
1600
1700
1800
1900
2000
2100
2200
2300
1990 1992 1994 1996 1998 2000 2002 2004 2006
Em
ploy
men
t (0
00's
)
Conclusion
• Things are finally moving in the right direction for Houston. This economy tends to lag the national economy. This period is no exception.
• A pick up in the national economy will help Houston and momentum will grow as the year progresses.
• The rig count is stable and employment is beginning to firm up with prices.
• 2004 should see 2.0 - 2.5% employment growth with 2005 possibly even stronger.