Outbreak roils Houston economy
Businesses hurt as virus disrupts global trade and sinks oil
Cargo ships canceled. Orders delayed. Oil prices falling.
The new coronavirus outbreak already is squeezing Houston’s globally connected economy, delivering fresh blows to a struggling energy industry, pressuring manufacturers that depend on components from Asia and eroding the confidence that keeps consumers buying products and services.
Whether the damage is lasting will depend on how long it takes to bring the outbreak and associated panic under control, analysts said, but the recent disruptions underscore the local economy’s exposure to international markets, supply chains and global developments.
“We diversified our markets by shifting from being domestically focused to being globally focused,” said Patrick Jankow
ski, an economist at the Greater Houston Partnership, a business financed economic development group. “It’s still a good strategy, but it does put us a bit at risk right now.”
The new coronavirus is the latest international shock to hit the local economy. For two years, manufacturers, energy companies, retailers and other firms that rely on China for both materials and markets have been caught in crossfire of the Trump administration’s trade war.
Scott Stearns, director of supply chain for MacroFab, an electronics manufacturer and manufacturing platform in Houston, said the difficulty in getting components from its supplier in China has more than doubled the time it takes for his company to assemble and ship printed circuit boards to customers such as Apple and Google, raising costs, lowering volumes and cutting sales. Executives estimate that revenues could fall 30 percent in the first three months of the year.
“I’m just learning the tariffs, trying to incorporate that into our pricing model to make sure we’re not eating it, and then boom, this comes in,” Stearns said. “It’s been very painful.”
The fears generated by the outbreak — and the many unknowns about the virus and how it spreads — is also increasing the risks to the local economy. After the first local cases of COVID-19, the disease caused by this strain of the coronavirus, were confirmed last week in the Houston area, some local businesses said customers are beginning to cancel appointments and stay home.
That’s not a good sign since consumers and their spending drive the U.S. economy — a prospect that has sent financial and commodity markets plunging.
“The most significant impact at the moment, by far, is the uncertainty that the virus is creating,” said Ray Perryman, a Waco economist. “Markets prefer even bad news to extreme uncertainty.”
‘It’s a chain reaction’
Houston’s economy is more globally connected than many other areas of the United States. China is Houston’s third-largest trading partner after Mexico and Brazil, which overtook China’s No. 2 spot amid the trade war. Trade between the Houston-Galveston customs district and China was nearly $15 billion in 2019, according to government statistics.
Factories in China are struggling to ramp up production after shutting down during the Chinese Lunar New Year — a holiday the government extended as it tried to get a handle on the coronavirus outbreak that originated in the city of Wuhan, in central China. As a result, manufacturers in Houston are getting hit by delays and canceled orders. Some have attempted to switch supply chains to other countries but face higher costs. Others are trying to wait it out.
Six cargo ships expected to come to Houston from East Asia have notified the Port of Houston that they will not arrive in March, said Lisa Ashley, spokesperson for the port. The port cannot say definitively whether the cancellations were due to the outbreak.
In a recent survey of Texas manufacturers by the Federal Reserve Bank of Dallas, all but one of 21 manufacturers (a medical equipment manufacturer) said COVID-19 would hurt their business in 2020.
“We’ve seen the most pronounced impact on the manufacturing sector,” said Pia Orrenius, an economist at the Dallas Fed. “Due to the decline in sales, revenue and production, it’s going to spill over into capital spending.”
Stearns, of MacroFab, said the company’s lead time before was 10 days to produce printed circuit boards in China, where MacroFab both assembles and manages assembly in contracted factories for customers, and two days to ship them. Now, it takes about 25 days to produce the PCBs, and five days to ship them.
Meanwhile, he’s worried that there will soon be a shortage of raw materials, such as fiberglass, to build the PCBs in China since companies are “gobbling up” and stockpiling raw materials.
“It’s a chain reaction,” he said. “You keep digging and put down the dirt and see, ‘Oh God, that’s affected too!’ ”
Local manufacturing executives said the outbreak calls into question whether a globally integrated supply chain is still a good idea. John Martin, owner and founder of Martin Company, a Houston electronics engineering and manufacturing firm, said that the outbreak underscores the importance of monitoring and diversifying supply chains.
“Sources need to be different companies, they need to be different plants, and possibly different countries,” he said. But, he added, “You can’t always do that if you only have one good source of a particular device.”
Oil and gas struggles
Houston’s oil and gas companies, many with international operations, are being hit by both a slowdown in productivity in Asia, where many major energy companies have international operations, and quickly falling demand for energy as a result of the coronavirus. Houston’s top exports to China include crude oil, liquefied natural gas, chemicals and plastics — all of which are closely tied to travel abroad and global economic growth.
China’s demand for crude has slipped by 1 million to 3 million barrels per day, according to various estimates, as analysts downgrade oil consumption forecasts. Global oil demand fell by nearly 5 million barrels a day in February, according to the Norwegian consultancy Rystad Energy. Oil prices, which are down more than 30 percent since the beginning of the year, settled below $42 a barrel.
Oil and gas companies in Texas are particularly exposed to the oil price drop, economists said, since many were already struggling to fund planned investments in 2020. Many have bet heavily on shale in West Texas, a play that needs a constant flow of capital to keep drilling as wells deplete.
The break-even point for most shale drillers is typically considered to be $50 a barrel.
“It’s a big demand shock for oil consumption,” said Jesse Thompson, an economist at the Dallas Fed. “At that price point, there are some (exploration and production) companies that are not going to be able to make their breakeven. That could translate in Houston to job (cuts).”
In Texas, oil and gas companies cut nearly 10,000 jobs in 2019, according to the Labor Department. In Houston’s energy corridor, where some of the world’s largest oil and gas companies are headquartered, businesses are beginning to see the trickle-down effect of the oil price slump.
George Reed, owner of George’s Pastaria, a neighborhood Italian restaurant near Houston’s energy corridor, said catered lunch deliveries to energy companies nearby have slowed in recent months.
Still, he said, business has been good — somewhat counter-intuitively. His midrange prices attract folks who want a nice dinner but who want to save a couple bucks, he said. When the corporate crowd is “wheeling and dealing,” they’re going to expensive steakhouses, he said, but lately, “perhaps they’re coming to me now.” Reed said their February sales were up 10 percent year over year.
Staying home, spending less
Whether customers keep coming to restaurants will likely depend on how long it takes for infection rates begin to stabilize rather than climb. Analysts said the economic impact will most likely be limited to the first six months of the year, but if the outbreak spreads into the summer, the damage could be long lasting.
“If it becomes more severe and dominates headlines for months, the effects will be much more profound,” said Perryman, the Waco economist.
As infection rates rise in the United States, fear of contracting the virus may keep some wouldbe shoppers at home or reconsidering major purchases. That “social distancing” could have farreaching impacts.
One example: In Pearland, Chandrakanth Vemula, who runs a small medical practice with his wife, Dr. Vishalakshmi Batchu, said that at least one client canceled a scheduled appointment for blood work due to fear of contracting COVID-19, stating she preferred not to be around doctors or hospitals during the outbreak, particularly after local cases were confirmed.
In Houston’s Chinatown, Houston fashion designer Danny Nguyen said sales at his boutique for custom prom gowns, bridal wear and men’s suits are down 50 percent as customers stay away. “I’m dying here,” Nguyen said.
That’s the sort of consumer behavior that economists are worried about. The services sector, which includes retailers, restaurants, health care and a long list of other service businesses, accounts for about 70 percent of the U.S. economy.
One survey by IHS Markit, a global research and consulting firm, showed a contraction in the service sector for the first time in four years in February. Confidence among services — which affects hiring and spending — has been restrained and employment growth has slipped, analysts write.
Consumer confidence is also eroding. A survey by Morning Consult, a market research company, shows consumer confidence in the economy is falling, sliding from an index reading of 114.9 on Feb. 23 to 111.8 on March 5.
The disruption to supply chains also could mean higher prices for products such as TVs and automobiles. Most major companies have an abnormally large amount of manufacturing and suppliers in China, said Margaret Kidd, manager of University of Houston’s supply chain and logistics technology program. Very few have inventories built up enough to ride out an extended slowdown in production caused by the outbreak.
“We’ve gotten, as an economy, so used to this just-in-time production that many companies have failed to do a risk management analysis or have alternative production and sourcing in place,” Kidd said. “There’s going to be delays, and delays cost money. Ultimately, there will be unhappy consumers.”