Outlook for the Houston Economy

Luis Bernardo Torres Ruiz, Ph.D. April 24, 2018

Research Economist City of Houston Investor Conference

1. Houston has turned the corner and is slowly

adding jobs. We can expect more progress

ahead.

2. Harvey was a big plus for the economy late in

2017, and the surge is now over, and will soon

disappear. It is time to put Harvey aside.

Contents

1. Economic Trends

2. Housing Market

3. Challenges and Issues

Business Cycle Index(Month-over-Month Annualized Percent Change)

Note: Seasonally Adjusted. Shaded area depicts fall in oil prices.Source: Federal Reserve Bank of Philadelphia and Dallas.

Houston has turned the corner of two years of no growth

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United States Texas Houston

Total Nonfarm Employment Growth(Month-over-Month Annualized Percent Change)

Note: Seasonally Adjusted. Shaded area refers to recession. Three-month moving average.Sources: Bureau of Economic Analysis and Bureau of Labor Statistics.

Houston has had a robust start to 2018 job growth . . .

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United States Texas Houston-The Woodlands-Sugar Land

Oil-Related Job Growth(Month-over-Month Annualized Percent Change)

Note: Seasonally Adjusted. Three-month moving average.Source: Bureau of Labor Statistics.

. . . as energy employment has returned slowly

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TotalExtractionSupport activities for miningFabricated MetalsAgriculture, construction & mining machineryArchitectural, engineering & related

Employment by Sector(Year-over-Year and Quarter-over-Quarter Annualized Percent)

Note: Seasonally adjusted.Source: Bureau of Labor Statistics.

Oil related job gains have spread to professional business services and manufacturing, accompanied by strong construction growth

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Information (1%)

Mining & Logging (3%)

Other Services (4%)

Financial Activities (5%)

Construction (7%)

Manufacturing (7%)

Leisure/Hospitality (10%)

Government (14%)

Education/Health Svcs (13%)

Prof/Business Svcs (16%)

Trade/Trans/Utilities (20%)

Total Nonfarm (100%)

Qtr-over-Qtr Ann. (3MMA) Year-over-Year

Goods-Producing and Services-Providing Employment (Month-over-Month Annualized Percent Change)

Note: Seasonally adjusted. Shaded area refers to recession. Three-month moving average.Source: Bureau of Labor Statistics.

Stable energy prices supported growth in the goods producing sector

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Goods-Producing

Services-Providing

Manufacturing Employment by Sector(Year-over-Year and Quarter-over-Quarter Annualized Percent)

Note: Seasonally adjusted.Source: Bureau of Labor Statistics.

Weaker dollar and strong global demand continue to be a push for manufacturing

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Petroleum & coal (5%)

Chemicals (17%)

Total nondurable goods (37%)

Computers & electronic products (6%)

Machinery (19%)

Fabricated metal products (23%)

Total durable goods (63%)

Qtr-over-Qtr Ann. (3MMA) Year-over-Year

Even with strong job growth wages continue to fall due to slack in the labor market

Average Hourly Earnings, All Employees: Total Private (Year-over-Year Percent Change)

Note: Seasonally adjusted and trend adjusted. Deflated with Consumer Price Index for all urban consumers: All items.Source: Bureau of Labor Statistics.

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United States Texas Houston-The Woodlands-Sugar Land

Average Hourly Earnings Mar-18U.S. $26.9Texas $25.6Houston $27.3

Manufacturing jobs continue to register positive wage growth

Average Manufacturing Hourly Earnings (Year-over-Year Percent Change)

Note: Seasonally adjusted and trend adjusted. Deflated with Consumer Price Index for all urban consumers: All items.Source: Bureau of Labor Statistics

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United States Texas Houston–The Woodlands–Sugar Land

Average Mfg. Hourly Earnings Mar-18U.S. $21.3Texas $23.2Houston $22.2

Outlook surveys for Texas and Houston point toward growth

Manufacturing and Services Outlook Surveys (Index)

Note: Seasonally adjusted. Shaded area refers to recession.Source: Federal Reserve Bank of Dallas and Institute for Supply Management. United States and Houston index is adjusted -50 to be on scale with Texas Index

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United States Composite (Mfg + Serv)

Texas Mfg

Texas Serv

Houston

Expansion

Contraction

OPEC Optimism Came and Went in 2017After OPEC Says: “Whatever It Takes …”

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WTI Oil Price Forward Curve

Futures 2 Nov 30-Nov 10-Aug $60

$60/b

August 25 ‘17

After Fall OPEC Accord Nov 30 ‘16

Before OPEC Accord Nov 2 ‘16

CME Group

Current Oil-Market Optimism Slowly Disappears from the Market Moving Forward

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WTI Oil Price Forward Curve$60/b

After OPEC Accord Dec ‘17

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CME Group

April 13,2018

U.S. Shale Oil Production Is Still the Oil Price Problem

(million barrels/day, s.a.)

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DOE/EIA, Seasonally adjusted by IRF

Peak: April 2015, fell 984,500 b/dNow: Back above all-time 1970 highs

Contents

1. Economic Trend

2. Housing Market

3. Outlook and Challenges

Single-Family Construction Permits(Index Jan 2007 = 100)

Note: Seasonally adjusted. Shaded area refers to recessionSource: U.S. Census Bureau and Real Estate Center at Texas A&M University

After difficult environment, permits are recovering after faltering (Houston leads the nation with 3,363 permits)

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United States Texas Houston-The Woodlands-Sugar Land

Supply of vacant developed lots increased with the exception of homes with a sales price below $200,000

Vacant Developed Lot Supply (Index 3Q2001=100)

Note: Seasonally adjusted. Shaded area refers to recession.Source: Metrostudy.

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$0 - $199,000

$200,000 - $299,000

$300,000 - $399,000

$400,000 - $499,000

$500,000+

Housing construction jobs seem to be less of a constraint issue in Houston

Ration of Residential Jobs to Residential Permits(# Jobs/ #Permits)

Note: Seasonally adjusted. Shaded area refers to recession.Sources: Bureau of Labor Statistics, and U.S. Census Bureau, and Real Estate Center at Texas A&M University.

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United States Texas Houston

Houston sales remained elevated 39 percent since Hurricane Harvey

Housing Sales(Index Jan 2007=100)

Note: Seasonally adjusted. Shaded area refers to recession. Sales for the United States include all existing homes and new single-family homes; new non-single-family homes are not included. Texas includes all existing and new homes.Sources: U.S. Census Bureau, National Association of Realtors, and Real Estate Center at Texas A&M University.

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U.S. Texas Houston-The Woodlands-Sugar Land

Housing sales are strong for all price cohorts except for below $200,000

Housing Sales by Price Cohort(Index Jan 2011=100)

Note: Seasonally adjusted. Includes all existing and new homes.Sources: U.S. Census Bureau, National Association of Realtors, and Real Estate Center at Texas A&M University.

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$0-$199,999 $200,000-$299,999

$300,000-$399,999 $400,000-$499,999

$500,000+ Total

Strength in existing home sales is reflected in low number of days a home is on the market

Homes Days on Market(Days)

Note: Seasonally adjusted. Shaded area depicts fall in oil prices.Source: Real Estate Center at Texas A&M University.

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New Existing

50-day difference

Months of inventory remain low as a result of strong housing demand and constrained supply

Months of Inventory(Months)

Note: Seasonally adjusted. Shaded area refers to recession. Months of inventory for the United States is estimated using weights for all existing homes and new single-family homes; new non-single-family homes are not included. Texas includes all existing and new homes.Sources: U.S. Census Bureau, National Association of Realtors, and Real Estate Center at Texas A&M University.

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Months of inventory remain low for the lowest price cohorts reflecting strong demand and short supply

Months of Inventory by Price Cohort(Months)

Note: Seasonally adjusted. Includes all existing and new homes.Source: Real Estate Center at Texas A&M University.

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$0-$199,999 $200,000-$299,999 $300,000-$399,999

$400,000-$499,999 $500,000+

Constrained supply and strong demand have accelerated price gains

Note: Seasonally Adjusted. Shaded area refers to recession.Sources: Federal Housing Finance Agency and Real Estate Center at Texas A&M University.

Housing Price Index(Index 2007=100)

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I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Texas

Houston-The Woodlands-Sugar Land

Median Price Mar-2018 All (New and Existing) Austin $300,000DFW $269,000Houston $230,000San Antonio $216,500

With rapid appreciation, Texas affordability continues to fall relative to the U.S., especially in the major MSAs

Housing Affordability Index(Index)

Note: Seasonally adjusted.Sources: Real Estate Center at Texas A&M University.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States Texas Houston-The Woodlands-Sugarland

Affordable

As inflation rises so will nominal interest rates

Note: Seasonally adjusted. CPI All Urban Consumers 1982-84=100.Sources: Federal Home Loan Mortgage Corporation, Federal Reserve Board and Bureau of Labor Statistics

30-Year Mortgage Rate,10-Year Bond Yield and Annual Inflation(Percent)

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Mortgage Bond Inflation

Contents

1. Economic Trends

2. Housing Market

3. Outlook and Issues

Moderate U.S. Recovery Continues

Chance of Recession About One Percent Today

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Financial Crisis

< 1.5 %

Percent

Consensus Forecast Is Still Strong: But Not Too Hot, Not Too Cool

2001 Recession

Source: Chauvet and Piger smoothed recession probabilities, FRED, St. Louis Fed; Philadelphia Fed, Survey of Professional Forecasters, Fourth Quarter 2017.

Real Unempl Payroll

GDP Rate Jobs

(%) (%) ('000/mo)

Quarterly Data:

2017Q3 3.2 4.0 146.9

2017Q4 2.5 4.0 183.0

2018q1 3.0 4.0 183.3

2018Q2 2.9 3.9 171.1

2018q3 2.8 3.8 151.8

2018q4 2.5 3.8 172.9

Annual Average:

2017 2.8 4.0 178.0

2018 2.5 3.8 175.1

2019 2.0 3.9 150.3

2020 1.7 4.0 NA

Texas economy will continue to grow in 2018 while forecast for Texas suggests acceleration in job growth from 2017

Texas employment is expected to grow around 3.4% in 2018.

Energy sector has stabilized and improved outlook for 2018.

Gains in energy sector would help many manufacturing industries.

U.S. economy will continue to expand at a moderate pace.

Decreased housing affordability, energy price volatility, and trade

uncertainty remained the greatest headwinds to the Texas economy.

Pull It All Together? • Three oil scenarios: high, medium, or

low. High is based on major political disruption to oil markets; medium sees 2018 drilling capped by producer discipline or over-production; low is OPEC again pulling out as swing producer

• Continued U.S. expansion at moderate or better rates

• Continued drag from the end of the East Side petrochemical construction

• Momentum from the fracking boom years is gone

• Harvey jobs slowly disappear

Forecast Job Growth Is Moderate As Drilling Discipline Takes Hold

(000 New Jobs, Q4/Q4)By Scenario

Year High Medium Low 15/70/15

2014 112.3 112.3 112.3 112.3

2015 8.9 8.9 8.9 8.9

2016 -2.6 -2.6 -2.6 -2.6

2017 29.0* 29.0* 29.0* 29.0*

2018 54.8 45.1 28.7 44.1

2019 81.9 60.7 34.0 59.9

2020 102.1 86.2 47.0 82.7

2021 85.0 71.9 51.6 70.8

*Excludes 24,700 temporary jobs in 2017Q4 driven by hurricane Harvey. Calculations of IRF, based on drilling scenarios above. Figures are Q4/Q4. The 2016 calculations include benchmark revisions of March 2018.

What Happens to the Medium Forecast With No Help from U.S.?

None From Oil?

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Mill

ion

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Forecast payroll jobs, million seas. adj.

Medium

No Oil

No U.S.

No US/No Oil

New Payroll Jobs (‘000) in Medium

Forecast Without Help from Oil and U.S.

Medium No Oil No US No Oil/No US

2017 29.0* 29.0* 29.0* 29.0*

2018 45.1 33.2 33.9 22.1

2019 60.7 36.9 32.0 8.6

2020 86.2 57.1 49.4 21.4

2021 71.9 40.9 55.5 25.6

2022 66.2 34.1 57.7 26.8*Adjusted for Harvey-related jobs in 2017Q4Note: In the medium forecast, about 40% of near-term growth is from oil, 30% from U.S. expansion, and 30% from long-term growth factors. Oil’s contribution is higher and U.S. lower than long-term contributions since 1990.

Improved 2018 outlook for Houston economy

Employment growth will increase in 2018.

Improved outlook for the energy sector not seen as quick and

strong enough to bring significant payroll job growth.

Houston’s housing market will grow in 2018

Low inventory levels point toward strong demand, especially

for housing with prices below $250,000

Tight inventories have caused a drop in sales of homes priced below $200,000

Note: Seasonally adjusted.Source: Real Estate Center at Texas A&M University.

Home Sales and Inventories(Months, Index Jan2011=100)

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Inventory ($0 - $199,999)

Inventory ($300,000 - $399,999)

Sales ($0 - $199,999)

Sales ($300,000 - $399,999)

Houston’s housing market will grow in 2018

Supply constraints will continue to be an issue due to the lack

of developed lots for housing below $250,000.

Increasing interest rates expected to create some roadblocks.

Moving forward, affordability will be an issue.

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