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“Bad, but not awful”

Your Houston economy, folks.

As Houston enters the second year of the worst oil downturn in decades, its once-booming economy has sputtered, and the strain finally is starting to show.

Houston could flirt with recession in 2016 as the oil and gas industry cuts jobs and spending, but the local economy isn’t collapsing the same way it has during prior oil busts, and most economists don’t think it will happen.

“It’s bad, but it’s not awful,” said Ed Friedman, director at Moody’s Analytics.

The infamous 1980s oil slump reverberated across Houston, causing 1 in every 7 local workers to lose their jobs before the market eventually recovered. This time around, a healthy national economy coupled with continued population growth and a surge of construction is buffering the metro area from deeper trouble.

The city is harnessing momentum from other booming sectors – petrochemicals, refineries, health care, construction – to offset the losses in energy and energy-related manufacturing.

“Houston is not the same Houston it was 30 years ago,” Friedman said.

Hospitals, clinics and medical offices are expanding as they try to keep up with a population boom of nearly 10 percent since 2010. Downtown Houston has been revitalized with new office towers and residential construction that sprang up when oil was hovering around $100 a barrel the previous two years.

And an estimated $50 billion in investment along the city’s petrochemical corridor is in the works, enough to build downtown Houston two times over. That industrial renaissance is bringing thousands of new construction jobs to the area that is helping compensate for the losses in energy.

“It’s the gift that keeps on giving,” said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston.

Nevertheless, economists predict that 2016 likely will be an austere year for Houston. The oil and gas industry is bracing for anemic crude prices over the next 12 months, and most analysts don’t expect meaningful improvement until 2017.

As a result, Houston could lose as many as 50,000 jobs in manufacturing and oil and gas before the industry recovers. How much those cuts drag down the local economy is an open question. The city still is expected to see a net gain in jobs this year that could reach nearly 25,000.

[…]

If Houston slips into a mild recession, the city may already be out of it by the time economists can measure it, as government data often lags by several months.

The Houston Purchasing Managers Index, a closely watched predictor of the city’s economic health, indicates the city already may have reached a tipping point.

“We’ve got a pretty good chance of moving into recession in the first quarter, if we’re not already in one,” said Harvison of the ISM.

Still, any contraction in economic activity will likely be short-lived as the pace of energy layoffs slows and Houston’s population continues to grow.

“People aren’t abandoning Houston,” said Patrick Jankowski, senior vice president of research for the Greater Houston Partnership.

In addition, the flurry of construction activity in the region’s petrochemical corridor isn’t slated to peak until late 2016 or early 2017, with Houston expected to add up to 10,000 more construction jobs next year, according to the Greater Houston Partnership.

To put this in somewhat technical terms, upstream – i.e., finding and extracting oil and gas – is in the dumps due to low prices, but downstream – i.e., refining and selling it – is doing fine. The price of crude is a fixed cost for refineries, after all, and the area still has plenty of those.

That said, upstream is where the big money and the highest-paying jobs are, and there’s a trickle-down effect when upstream is struggling. Texas Monthly frets about the real estate market in Houston.

It’ll be different this time. We diversified.

When you make the comparison to the oil bust that devastated Houston’s economy in the 1980s, that’s the mantra you inevitably hear from those who have remained bullish on the Houston economy since oil went in the tank late last year. (For the record, comparing 2015 to 1982 exasperates the hell out of Jankowski: “This is in no way going to look like the ’80s and hopefully this is the last time I have to say that to anybody,” he said when the GHP released its official economic outlook for 2016 in December.)

Almost all of those people cite the booming Texas Medical Center as exhibit A in defense of Houston’s diversity, but as we pointed out in October, though it’s true that the Med Center has grown, O&G has grown even more. At its peak it was proportionally even more important to Houston’s economy last year than it was in the 1980s.

Many of those optimists struggle to come up with an exhibit B, but some of those who do cite a boom in the construction industry, which brings us back to real estate, and how we are just starting to see how oil patch job annihilation is trickling down into the residential real estate market.

It’s becoming apparent in home sales. Since we last looked in on the market, they have fallen 10 percent in October and 10.5 percent in November. Townhouses and condos fell 10.3 percent in November, and now the apartment market is starting to soften. That comes on the heels of a Forbes report that shows Houston has permitted more residential projects than any other large U.S. urban area between 2011 to 2014.

That extends to rentals. Neal Verma owns 16 apartment complexes in Houston, totaling 6,000 units. A quarter of those are Class B (8 to 20 years old) and the remainder Class C (older than 20 years.) Verma told the Houston Chronicle in December that many of his Class B tenants work in O&G, and many of his Class C tenants are construction workers. He is seeing a decline across the board. As oil workers get their walking papers, they move out. As oil companies tighten their belts, they stop building new office buildings, and thus construction workers pack up their toolkits and beat feet out of town as well.

The decline isn’t drastic—yet. Verma said that his complexes have dipped from 100 percent occupancy to 95 percent at his Class B properties and 98 at his Class Cs, but there’s no way to spin those numbers positively, especially not with a grim year ahead. The bulk of Houston’s top paying white-collar jobs are in energy, and construction stands atop the heap for blue-collar jobs. Now that the oil downturn has cooled construction, we have seen the first ripple, and barring a sudden, drastic upswing in the price of crude, it seems inevitable that these losses will soon become apparent in retail and restaurants, if they have not already.

What’s keeping the Houston real estate market above water for now is empty nesters from the suburbs who aren’t really affected by the fluctuations of crude oil prices, and the Chinese. You can click over to read the rest. However you look at it, pretty much everyone is hoping things will get better before they get worse, because there’s still a lot of room for it to get worse.

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