With phrases like, “broad based growth,” “robust employment” and “Texas will outpace the nation,” Mine Yücel, Senior Vice President/Director of Research at the Federal Reserve Bank of Dallas (FRB), kicked off the first of four 2015 Economic Forecast panels. Yücel sees the likelihood of ending 2014 at a 3.5 percent employment growth rate for Texas while the U.S. rate is forecast to finish up 1.9 percent. Yücel spoke in both Dallas and Austin, and Anil Kumar, Senior Research Economist and Advisor, shared his observations and statistics in both Houston and San Antonio. The forecast events were held at the Federal Reserve Bank of Dallas, the FRB Houston Branch and the FRB San Antonio Branch, and at the AT&T Conference Center in Austin. Collaborators for the 2015 Forecast events were Texas CEO Magazine, Texas Enterprise and the McCombs Alumni Network.
Who’s Got the Jobs?
While energy may top all others in sector growth at over nine percent, energy still represents only 2.6 percent of Texas jobs. The highest number of jobs added this year is in the professional and business services sectors with one-third of them in technical and scientific jobs. The next highest sector of growth in jobs was in trade, transportation and utilities, with retail jobs the largest gainer.
The high rate of growth has also led to labor shortages, especially in energy and construction. “We have one Houston contact who reported he was hiring armed guards to keep poachers away from his work sites,” noted Yücel. Specifically, there are shortages in specialized workers such as welders, masons, and plumbers and many employers tell Yücel they can’t find workers who can pass the Federal background checks.
While one construction sector, road and bridge construction, is not doing well, residential construction contracts are steadily growing and up about 6.4 percent year over year. “Our contacts are telling us there’s a shortage of developable lots and higher construction costs and labor shortages are limiting growth, and that’s also extended delivery time,” said Yücel.
Yücel cautioned attendees, “These labor shortages aimed at job growth can’t continue at this pace and it’s going to slow as we go forward.”
With Texas the number one producer of oil & gas in the nation, Yücel reminded everyone, “We don’t only produce oil, we supply the world with oil & gas services with one-quarter of U.S. refining capacity and 60 percent of the petrochemical capacity based in Texas.”
In addition to oil & gas jobs, Yucel noted there are jobs in professional services, construction and manufacturing within the energy sector paying very high wages – the highest wages among all industries – which is bringing significant amounts of income into the Texas economy. In 2012, Midland was the metro with the highest per capita income growth and highest per capita income at $83,000 – greater than New York or San Francisco.
The price of oil has been tracking downward in the last several months, and while that helps the consumer in gas prices, Yücel cautioned that oil from shale, the kind produced in Texas, is expensive and needs to be at $70 a barrel to be profitable, so if prices fall below $70 it will stifle growth in the industry and likely within Texas.
Yücel sees the world economy in a flux and the greatest risks to Texas are the economies of Europe and Asia, along with a labor shortage that will slow our growth rate.
Shortages of skilled workers and vacant lots for building have caused some bottlenecks in the construction sector, especially for single-family homes, noted Anil Kumar. The result is a reduced supply of homes on the market, with current supply levels sitting at 3.6 months statewide, much lower than the real estate market’s ideal 6-month supply.
This reduced supply has caused increased home prices, reducing the availability of affordable housing. Kumar sees this trend starting to change. “There is some good news,” Kumar said. “It appears the housing price appreciation has started to soften a bit.”
Following the economic crisis, mortgages that are 90-plus days delinquent or in foreclosure reached record highs, but they have been steadily declining and are now nearing pre-recession levels.
As the economy of Texas continues to outpace the national economy, the energy sector continues to drive Houston’s economy. In fact, while crude oil production increases across the United States, Texas accounts for nearly half that growth – and that’s true even with recent price declines in crude oil.
Oil & Gas
Despite lower oil prices, the Federal Reserve says the energy sector is holding steady. And Greg Armstrong, chairman and CEO of Plains All American Pipeline, said the sector is full of good news. Production in the United States and Canada is on the rise, with significant “running room,” Armstrong said. Producers in the U.S. are spending about $100 billion a year at current activity levels, with major investments in Texas – primarily South and West Texas. In fact, Texas is responsible for about half the projected growth in U.S. production over the next four years.
Right now, production in the U.S. and Canada is 3.5 million barrels of crude a day. In the next four years, it’s expected to grow to 3.9 million, Armstrong said. But looking at supply and demand, how will that growth in production be handled without causing the price to crater?
“The challenge is the quality of the crude,” Armstrong said. “About two-thirds of the 3.9 million barrels a day are going to be medium and light, sweet crude oil and condensate. The majority of the 5.2 million barrels a day we import are heavy and medium sour. There’s a quality imbalance here that we have to handle.”
The petroleum industry is waiting for guidance from the government, Armstrong said, because the U.S. is prohibited from exporting light crude. “If the government would give us a little bit of clarity, we can expend some capital and handle that,” he said. “Right now they’ve gone silent and that’s the worst thing because that creates paralysis.”
The crude must be moved from the wellhead to the processors, another area of significant capital investment, said Armstrong, but that also means there’s a time of volatility coming because the quality of crude being produced doesn’t match the quality that most refineries are set up to run.
But while that volatility will seem chaotic, Armstrong said the outcome will be positive. “If you know the storms are coming, you can prepare for them and you know what the outcome is,” he said.
With the increase in production outstripping demand, Armstrong said we’ll need an increase in demand, less production from Saudi Arabia, and a halt to production in geopolitically conflicted countries.
U.S. companies spending $90-$100 billion a year require capital and “constructive” oil prices, Armstrong said. Many smaller producers are spending up to 140 percent of their cash flow and are relying on the capital markets to make up the gap. But even if the price of oil goes down to $75-$80 per barrel, many plays can still make a 15 percent return. The real question, Armstrong said, is: Will the boardrooms and shareholders embrace high spending in a lower price environment? He anticipates that the quick decline of existing production will trigger higher prices over the next six to 18 months.
“If we end up with low prices for a while it won’t last long before we have a correction and go right back up,” he said. “By that time, the world tends to expand demand with lower prices and we’ll reset the bar and go forward.”
Imports & Exports
The growth in oil production is having a major effect on the Port of Houston, said Janiece Longoria, chair of the Port Commission for the Port of Houston Authority. Commerce at the port is the strongest in its history, and the port is seeing large construction projects in export cargo.
“Our manufacturing partners on the Houston Ship Channel have invested approximately $35 billion in manufacturing and export capability in the last three years,” she said, and because of all of the manufacturing infrastructure in the petrochemical industry along the Houston Ship Channel, there is a significant increase in exports of manufactured petrochemical products to foreign markets.
Some of those projects include the construction of the world’s largest refrigerated ethane export facility at Barbour’s Cut. Six major plastic resin manufacturing projects have been announced on the Houston Ship Channel, all coming online between late 2016 and late 2017.
“Our petrochemical partners have advised us they expect their exports to double and possibly triple in the next two to three years,” Longoria said. “They have come to us with the message they need us to be ready to handle that significant additional export activity out of our port.”
Beyond petroleum, growth at the port is also being driven by growth in the regional population. “Our regional population is growing faster than any other region in the nation and it’s expected to double and even triple in the next 20 to 30 years,” she said. Regional population growth drives consumer demand, which in turn drives demand for products delivered as containerized cargo.
The expansion of the Panama Canal will also have a major impact on the port. Capacity of the canal will double, and it will be able to handle more and larger ships. That project will be ready in the spring of 2016. “We’re already the leading Gulf Coast port handling 66 percent of containerized cargo,” Longoria said, “and I believe because of our strategic location and our population reach, we will be the beneficiary of significant additional cargo across our docks with the expansion of the Panama Canal.”
She said the revived energy sector is leading to a growth in manufacturing, which leads to more exports, which leads to reaching more foreign markets through the canal.
To handle the expected growth, the Port of Houston is investing a billion dollars over the next five years in both dredging and infrastructure, Longoria said. Container terminals are being dredged from 40 feet to 45 feet and will be finished when the expanded Panama Canal opens. At the Barbour’s Cut container facility, the port will spend $700 million to double the container handling capacity and buy larger cranes to accommodate larger ships.
Refrigerated cargo is also a potential growth area. “The POH has a very small piece of refrigerated cargo imports, which is unusual, considering the size of our population and our consumer reach,” she said. To do that, the port needs more refrigerated cargo space. An RFP for cold storage and warehousing near the Bayport container terminal has already attracted some responses.
One area not directly affected by the oil industry is health care. Here, too, the outlook is positive. The Greater Houston Partnership says population growth will add 7,900 doctors and nurses to the employment rolls in 2014. And Dr. Bobby Robbins, CEO of the Texas Medical Center says the future is bright for large hospitals.
“I don’t think the future is bright for small hospitals in small towns,” he said. As incentives and rewards in health care change, hospitals will be forced to deliver the highest quality product at the lowest price with the best customer service. Robbins said that represents a change, because until recently, hospitals hadn’t had to emphasize customer service.
Now, hospitals are being held accountable for such metrics as patient mortality and length of hospital stays. “The big institutions like the ones in the TMC with healthy balance sheets that are forward looking and innovative, have gotten the message,” he said. “They are shifting from fee for service to value-based operations.”
Robbins said his biggest challenge is getting all of the institutions that make up the Texas Medical Center to work together on interdisciplinary projects. He mentioned Boston, where Harvard, MIT, Massachusetts General Hospital, Brigham and Women’s Hospital, Tufts University and Boston University all work together in the field of genomics. “Clearly they are the leading genomics institute in the world,” he said.
In Houston, “There are no real signature programs that you could point to that says, ‘this is a Texas Medical Center interdisciplinary program,’” Robbins said. He said it will be important to develop a Boston-style collaboration, because that will be important in terms of research funding.
Robbins said one example of that has already started. In early October, the country’s largest life science innovation center opened at the TMC. Robbins said the new center, “will allow us to be a real center for life science innovation and commercialization here in Houston, much the same of what goes on in Boston and New York.”
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