Commentary: Economic Outlook for 2018

My view of the forecast for the Houston economy in 2018 is summed up in one word: bland. There is a lot of talk in the media about the robust stock market, historical highs, and tax reform; but, the indicators do not point to a bright horizon for Houston. By just looking at the data, there might be a slight improvement but not much.

The Dallas FED released a publication entitled Houston Economic Indicators on November 30, 2017. The main concern is how Houston has recovered from Hurricane Harvey. Simply put, the hurricane set the Houston economy back to ground zero. Here are some insights from the report:

  • Business Cycle Index – October year to date growth is 2.2%. Not a lot to get excited about.
  • Employment – October year to date growth is 1.4%. From September 2017 to October 2017, the Leisure and Hospitality sector experienced a whopping 50.3% annualized growth. This is not really a positive for two reasons: these jobs are typically low paying service jobs and the numbers are probably skewed due to so many people getting hotels after the hurricane.
  • Bankruptcies – This number is up. The FED says that since this is a lagging indicator, then Houston is past the worst of the economic down turn.

I have lived in Houston since 1966, 5 years old. Nearly all of my work experience is concentrated in oil/gas, petroleum refining, and petrochemicals. I have worked in these industries since I was 18 years old. Thus, I have a difference set of metrics. They are summed up here:

  • West Texas Intermediate – The St. Louis Fed reports that WTI is between $57 and $58 per barrel. $60 oil is good but not when Saudi Arabia is pressured to cut back significantly on production.
  • Crude Oil and Petroleum Stocks – Since 1990, according to EIA, this number has fluctuated around 1.7 billion barrels. The number surged to a little over 2 billion in 2017 and is currently just slightly below 2 billion. This is not an optimistic piece of news. In my view, its all about supply and demand; and if the industry is piling up the inventories, then that is a sign of looming economic disaster.
  • Bank Interest Rates – The interest rate on your money market account is about 1.5% right now. That is a very low number. When the economy was heating up back in 2004 to 2008, the interest rates were very high, over 5%. That is because businesses are scrambling for your money. Trade is good and companies need capital for expansion. The current rate of interest does not show that corporate America is expanding.
  • Over the years, I have noticed that the economy is booming when there is a large amount of mergers and acquisitions. According to a monthly newsletter from FactSet, the numbers of deals and the amount of cash changing hands is essentially flat for 2017.

In conclusion, I am still bullish on Houston. What I mean to say is, the first half of 2018 will probably be boring; but, it is possible that the summer driving season, coupled with plant upgrades and revamps scheduled for the warm weather season, could spur a rebound in the Houston economy. This is especially true if Saudi Arabia continues to cut production.

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