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Houston’s Monthly Metrics: January

The following article originally appeared in the January newsletter to clients of Kiley Advisors, LLC for the purpose of providing the latest leading indicators and industry issues to those clients.  Reprinted with permission.

Oil prices have dampened the outlook for 2015.  Reports of delayed or indefinitely postponed projects are already being heard.  While coming off of a record year, 2015 will not be a continuation of 2014.

Office and retail are both expected to taper off from their astounding number of projects and housing demand is expected to ease as the lower oil prices will likely result in a dip in consumer confidence.  However, schools and medical construction are both expected to rise in 2015, playing catch up with the residential and commercial growth over the past few years.  Light industrial is also expected to remain strong, as the preparation for the Panama Canal expansion and ethylene plants and LNG come online in 2017 and 2018, respectively.

The City of Houston permit numbers continue to vastly outpace 2013, and the Architecture Billings Index, a leading indicator for construction, is flat on a national level (50.9) but souring in the southern region (57.9), where anything above 50 indicates an increase in billings.

The question mark surrounding 2015’s outlook continues to be the price of oil.  How low?  How long?

The Federal Reserve is hearing reports of anywhere from the second quarter to the fourth quarter before a return to normal in 2015.  A drop in rig counts has already been seen, particularly in the Permian Basin, and layoffs of the low hanging fruit of the oil & gas companies is expected.

The positive side to this slowdown is it allows contractors to take a breath and regroup after a frenzied year.  We have heard reports of Houston commercial contractors struggling in the market as their capital was limited to keep up with the pace of growth.  This break may allow those companies the time they need to replenish their reserves.  Fluctuating material costs have made it difficult to price jobs.  Concrete, gypsum, asphalt, and others have seen big increases over the last year, while iron, copper and diesel have been dropping.

Dr. Bill Gilmer, with the Institute for Regional Forecasting at the University of Houston, recently updated his forecast from a month ago, to address the impact of oil on Houston, both in the near term and for years to come.  The expectation of a cyclical Houston economy, heavily dependent on the global supply of oil versus the US production, is worth serious consideration.  According to Gilmer, a cut of 1/3 of the oil and gas projects on the east side of Houston, along with a 20% cut in E&P would bring Houston’s employment growth down to 50,000 next year and 40,000 the year after.  An even deeper cut would have even profounder consequences.  Read his full updated outlook: For Better and for Worse: Oil Industry Still Drives Houston’s Economic Outlook.

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