Index signals Houston economy slowing

It’s first contraction since Harvey in 2017

Houston’s economy last month showed signs of contracting for the first time in more than two years.

The Houston Purchasing Manager’s Index, a well-regarded gauge of economic activity in the region, showed that the local economy pointed toward shrinking in November. It’s the first time the indicator has shown that goods production contracted since Hurricane Harvey, which left 200,000 homes and businesses flooded, knocked out power for more than a quarter-million customers and caused an estimated $130 billion in damage.

The index, which measures the direction of Houston’s economy by predicting likely shifts in production three to four months in advance, registered 46.9 in November, down 4.2 points from October. Readings above 50 generally indicate an expansion; readings below 50 indicate a contraction in goods production, a leading indicator for the local economy.

It’s calculated based on survey responses from local executives reporting prices, production, sales and inventories. Excluding the drop from Harvey, this is the first time the index has fallen below 50 in three years.

“This underscores everything else we’ve seen in the economy — the slowdown in construction, trade is barely up, and the slowdown in oil and gas,” said Patrick Jankowski, an economist with the Greater Houston Partnership, a business-financed economic development group. “I don’t see a recession in the numbers, but I see much slower growth than everyone would like it to be. The first two quarters (of 2020) are going to be the roughest.”

Still, economists cautioned that it’s a sign from just one month — and that while the falling index might be concerning, it’s not quite low enough to indicate full-blown contraction. The PMI, said Jesse Thompson of the Federal Reserve Bank of Dallas, would need to be further into the low 40s for the local economy to really begin shrinking.

“The PMI is a very good realtime measure (of Houston job growth), with slight leading ability,” Thompson said. “This is neutral territory for Houston.”

Usual suspect

Economists said the culprit responsible for the weakness is likely the energy sector, which has fallen into a slump in the second half of 2019. Oil prices have been stuck below $65 per barrel for much of the year, and with Wall Street investors reining in oil exploration and production companies’ spending, several compa

nies have cut back. Producers have pulled more than 270 drilling rigs from operation in oil and gas fields since the start of the year, a 25 percent decline.

For Houston, that’s meant fewer jobs in the energy sector. Employment in mining and logging, which in Texas is dominated by the oil and gas industry, was down 1.4 percent in the second quarter from last year, according to the Federal Reserve Bank of Dallas. The Houston PMI, a more recent indicator, showed that health care was the only sector that grew in November. Oil and gas, manufacturing, transportation and utilities, and professional services respondents all reported contracting economic activity, according to the Institute for Supply Management, which produces the index.

While Houston’s economy is more diverse now than perhaps during the 1980s oil bust, energy still makes up 9 percent of the local economy, according to the Greater Houston Partnership, and other sectors, such as manufacturing, are heavily tied to the health of the energy sector. More than a quarter of manufacturing jobs in the region are tied to oil and gas. Already, some manufacturers, which account for about 17 percent of the Houston economy, have reported cutting back or shuttering operations as a result of the energy slump.

“The energy industry has really had a tough time,” Thompson said. “The access to credit is really tight, and the cheap money is gone. This is nothing like 2015, but it’s still negative for the industry.”

Another sign of what’s come for Houston comes from the Federal Reserve Bank of Dallas. The Dallas Fed’s index of leading indicators, based on data such as manufacturing orders, home sales and the U.S. rig count, recently pointed toward lower growth in the near future.

Still, the Dallas Fed’s measure of the local economy, the Houston business-cycle index, shows the economy was growing at an annual rate of 2.7 percent this year through October, down from an average pace of 3.2 percent.

Job growth slows

Houston also had much weaker job growth in the second quarter than earlier estimates suggested, an analysis by the Dallas Fed found. Economic data is often revised after it is first released because the earliest data available is not comprehensive and based on smaller samples.

Job growth from the start of 2019 through October was 1.4 percent over the prior year, the Dallas Fed calculates, slower than the historic average of 2.1 percent.

Local economists agree that Houston is likely to see weaker job growth in 2020.

Bill Gilmer, economist and director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business, forecasts that the local economy will add around 62,100 jobs next year. Jankowski of the GHP puts it lower, at 42,300. Both would be a slowdown from what the Dallas Fed projects as the jobs added in the local economy this year, around 63,100.

“The oil industry is a drag on Houston’s economy right now,” Jankowski said. “If it was simply flat, you could do OK. But we’re definitely in for a couple quarters of much slower growth.”