Houston’s job growth machine is broken, UH economist says

Lower-for-longer oil prices, massive energy job cuts and slowing population growth are presenting a clear, stark reality: Houston’s economy will stall in 2016.

Almost a year after OPEC decided to stop propping up crude prices, trouble in the oil markets is spreading across the local economy.

“Many of the options to quickly get out of this downturn are receding rather quickly,” Bill Gilmer, chair of the Institute for Regional Forecasting at the University of Houston, said in his semiannual forecast.

For the past two years, Gilmer has been consistently more upbeat about Houston’s economy than I have, so when he starts getting gloomy, it’s time to pay attention. The problem, Gilmer pointed out, is that every time the energy sector lays off an employee, it endangers four jobs in the broader economy. About 50 percent of Houston jobs are indirectly tied to revenues produced by oil and gas companies, Gilmer says, so when they stop making money, it hurts.

After adding more than 120,000 jobs in 2014, Houston will create close to zero net jobs in 2015, according to the Federal Reserve Bank in Dallas. This doesn’t bode well for next year.

“As soon as the price of oil falls, all of the sudden, the job growth machine is broken,” Gilmer said.

The energy sector has laid off 56,000 people in Texas alone, according to the Fed. In Houston, the bank has also observed job losses in manufacturing, professional services and real estate. Only health care, education, information technology and government will add jobs in 2015, but they won’t make up for all of the losses elsewhere, the bank said in a report last week.

The energy sector needed to shed those jobs because in the fourth quarter, earnings will decline 64 percent compared with last year, the data analysis firm FactSet estimates. Many Hous-

ton businesses haven’t felt energy’s pain yet because the lag between when trouble strikes the oil patch and when it shows up at grocery store cash registers is often a long one. But cracks in the region’s economy are becoming apparent.

Class A office occupancy rate in Houston is dropping to 80.8 percent, compared with 88.1 percent last year, according to real estate firm Colvill Office Properties. Class A or B office space available for sublease in Houston has reached 5.8 million square feet, the company reported Monday. That’s the equivalent of about 20 multistory office buildings.

Homeowners got a shock last week when the Houston Association of Realtors announced that area home sales dropped 10 percent in October from a year ago. It was the first double-digit plunge since 2011, when the city was still recovering from the wounds of the Great Recession. Hot neighborhoods are cooling off, while less popular areas are going cold.

Needless to say, these dire numbers have made Houston executives pessimistic. The Houston Purchasing Managers Index, which measures wholesale orders, rose marginally from its September level of 47.6 percent to 48 percent in October, but with 50 percent considered neutral, the index remains in negative territory.

If Houston’s economy relies on higher oil prices, then the depth of the problem can be seen parked off Galveston, where a 2-mile-long line of tankers parked is carrying 28.4 million barrels of excess oil. The world is producing at least 2 million more barrels a day than the world needs, and that glut has sent prices below the breakeven point for most wells, damaging corporate balance sheets of energy and energy-related firms.

Many experts expected oil and gas production to slow by now, which would boost prices and, eventually, profits. But due to a variety of economic and geopolitical issues, crude supply has grown, and there is no sign it will let up anytime soon.

Forecasters at Vitol, the world’s largest energy trader, expect oil to trade below $60 a barrel in 2016.

Gilmer expects the energy markets to balance in late 2016 and to recover in 2017. That’s the optimistic bet and assumes no major economic disruptions.

A strong U.S. economy will keep Houston from slipping into recession, Gilmer said, but U.S. growth has been uneven this year, and I worry the global economy may be cooling more than expected.

The drop in energy expenses has not translated into higher consumer spending, with most Americans paying down debt and building savings instead. Developing countries are the source of almost all new demand for fossil fuels, and those economies remain mired by low commodity prices. That lack of demand could delay a return to higher energy prices.

Here’s what we do know: The Houston economy in 2016 will be a lot slower than 2015, and the repercussions will affect many more people.