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nied it spared virtually no indus-

try or region of the country,and Houston was no exception.The U.S. economy slipped intoa mild recession in December2007 and, with the onset of thefinancial crisis, fell into a severedownturn in 2008. The globaleconomy followed, commodity prices tumbled and Houston’senergy boom came to an abruptend. The Houston metro arealost 106,000 jobs in 2009, briefly matching the U.S. rate of jobloss at the height of the crisis.

The Metro Business-CycleIndexes computed by the Fed-eral Reserve Bank of Dallasprovide a broad measure of thelocal business cycle for Houstonand other major Texas metroareas. These indexes includepayroll employment, as wellas the unemployment rate, real

wages and real retail sales, andare explicitly designed to trackthe real business cycle. Accord-ing to this measure, Houston

was the last major Texas metroto enter the downturn, but thelocal recession was deeper thanin all other metros but Austin(Table 1). Houston’s recessionended in December 2009, timed

with much of the rest of the

state and six months after theU.S. recession officially ended in

June 2009.Houston’s recovery is now

complete, in the sense that

losses to recession are restored

and the economy has surpassedprior peak levels. The previ-ous peak number of jobs waspassed last October, and thebroader Metro Business-CycleIndex recovered even earlier, inMay 2011.

Houston’s job growth moreor less matched that of the U.S.in the beginning stages of recov-ery, but by early 2010 Houstonsurged ahead. From December2009 to December 2011, Hous-ton’s annual rate of job growth

was 2.4 percent, far ahead of the 1.0 percent rate registeredby the U.S. economy.

Why has Houston outper-formed the U.S. in the recovery?Primarily, it has been due to thereturn of many of the same con-ditions that prevailed from 2003to 2008. Emerging countries

are again the engine of globalgrowth, pushing oil and othercommodity prices upward andproviding rapidly growing mar-kets for local exports. Oil andgas exploration and production,petrochemicals and refining areall reaching beyond a slow-moving U.S. economy and tap-ping into a global market that isexpanding much more quickly.These emerging markets aregiving the Texas Gulf Coast aneconomic impetus that many other parts of the country lack.

Growth in Emerging Markets

Rapid expansion of emerg-ing countries such as Brazil,

China and India is essential toHouston’s near-term prospects.First, these countries providea market for oil services andmachinery, petrochemicals,refined products and a variety of nonoil products shipped fromthe region. Having surpassedCalifornia a decade ago, Texas isthe leading export state, and theGulf Coast is one of the most

important exporting regions.Second, growth in these coun-tries has returned oil and othercommodity prices to high levels.

Figure 2 illustrates how theglobal recession pulled downenergy prices in 2008–09 beforethey revived quickly. High oilprices are crucial to Houston’senergy sector, as many of thetechnological advances drivingU.S. energy development are

Table 1

Houston’s Great Recession Was Shorter But Deeper than Other Major Texas Metros’

Metro area Peak TroughDecline

(percent)Trough to 2012

(percent)

Texas July 2008 November 2009 –5.2 5.1

Austin February 2008 January 2010 –7.4 6.2

Dallas February 2008 December 2009 –6.4 3.7

Fort Worth May 2008 November 2009 –5.5 4.9

Houston August 2008 December 2009 –7 10.6

San Antonio April 2008 September 2009 –3.5 2.2

SOURCE: Federal Reserve Bank of Dallas.

Figure 1

Houston Employment, 1996–2011

Percent change (December to December)

–5

–3

–1

1

3

5

2011201020092008200720062005200420032002200120001999199819971996

SOURCE: Bureau of Labor Statistics, adjusted by the Federal Reserve Bank of Dallas.



23

dependent on oil prices of $70

per barrel or higher.High oil prices are oftenattributed to a variety of causes,including low interest rates anda depreciating dollar. But thereis little doubt that the growthof emerging countries is thedominant factor. The Interna-tional Monetary Fund foundthat from 2001 to 2007 thesecountries accounted for morethan half of the increase in oilconsumption, all of the increasein aluminum and copper con-sumption and nearly all of thegrowth in the consumption of major food crops. (The rest of the increased demand for food

was mostly for its conversion

to energy, for example, ethanol

and biodiesel.)1

As these coun-tries have raised their standardof living, they compete withthe developed world for scarceresources, pushing commodity prices upward.

Table 2 is a recent eco-nomic forecast from the Orga-nization for Economic Coopera-tion and Development’s (OECD) Economic Outlook published inDecember.2 Note how quickly the emerging countries of Bra-zil, China and India bouncedback in 2010 and 2011 fromthe global downturn, while thedeveloped countries limped outof the recession. In the 2012and 2013 forecasts, the same

fast/slow pattern continues,except that Brazil sees growthcut in half after 2010. Even so,its 3.0–4.0 percent growth rateis better than any of the devel-oped regions listed in the table.

Some potential risks to theglobal economy—and to Hous-

ton—can also be read into Table2. First, there is no recessionforecast for Europe. Some coun-tries in the euro zone are fore-cast to fall into or continue inrecession, but the entire regionskirts a downturn. But a crisisin Europe—a messy default by Greece or a freezing of creditmarkets—would imply a muchdeeper decline. This has seri-

ous implications for all Europe’strading partners, including theemerging nations. For example,22 percent of China’s exports goto Europe versus 19 percent tothe U.S.

Second, 2012 is a sec-ond year of slowdown for theemerging countries. Some of thisis deliberate. Their central banksreacted to rising inflation and

have engineered slower growththrough higher interest rates.These forecasts assume that thispolicy leads to a soft landing,not slowing these economiestoo much, and that no realestate or banking bubbles could

yet burst in response to tightercredit.

Big risks aside, the OECDoutlook points to less globalstimulus for Houston in 2012.The continued risk of a crisis inEurope will keep the dollar rela-tively strong, lowering oil pricesand hurting Gulf Coast exports.The modest slowdown in devel-oping countries is already takingsome of the air out from undercommodity prices, as shown inFigure 2. Lower oil prices couldreduce cash flow for oil pro-ducers and reduce their capital

spending.

The Energy Boom

The past three years havebeen a remarkable period

Figure 2

Oil Is Part of a Wider Boom in Commodity Prices

Index, January 1992 = 100

0

100

200

300

400

500

600

700

800

’11’10’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’93’92

Crude oil

Metals

Food

Ag raw materials

SOURCE: International Monetary Fund.

Table 2

Global Growth Slows in 2012 Forecast

GDP growth (percent)

2010 2011 2012* 2013*

Developed economies

Europe 1.4 0.9 0.6 1.7

Japan 1.6 0.8 1.7 1.6

U.S. 2.5 1.5 2 2.7

Emerging economies

Brazil 7.5 3.4 3.2 3.9

China 10.4 9.3 8.5 9.5

India 9.9 7.7 7.2 8.2

*These numbers are forecasts.

SOURCE: “OECD Economic Outlook No. 90,” OECD Economic Outlook: Statistics and Projections database, December

2011.



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for the energy industry andfor Houston. They have beenmarked by high oil prices, therapid development of technol-ogy to take advantage of thesehigh prices, and extraordinary differences between high oiland low natural gas prices. All

this has worked to produce sig-nificant profits for upstream oilproducers and service compa-nies, as well as for downstreampetrochemical producers.

Drilling outside the U.S. andCanada is primarily directed tooil, and as oil demand and priceimproved with the global econ-omy, so did the international rigcount. International drilling bot-

tomed out in June 2009, returnedto the prior peak by July 2010and has expanded steadily since.This international work generateshigh revenues and is importantto Houston’s service and machin-ery companies.

In recent months, thedomestic rig count also hasreturned to its prior peak lev-els of drilling activity, but theroute to recovery in the U.S.

was much more complicated.In many ways, the rig count of 2012 is simply not comparableto the rig count of 2008. Whathappened?

•Newtechnologyusing

horizontal drilling and

fracturing was applied toshale to produce naturalgas. It proved enormously successful in bringingnew supplies of naturalgas online ( Figure 3).Natural gas is not widely traded internationally like

oil, and large new sup-plies of gas trapped ina weak U.S. economy quickly brought the priceof natural gas down to$3–$4 per thousand cubicfeet. Natural gas becamea bargain to the con-sumer and a drag to theproducer because oil at$80 per barrel is 3.4 times

more valuable than natu-ral gas at $4 per thousandcubic feet.

•Highoilpricesinvited

new technology forits production, and(along with other newapproaches) horizontaldrilling and fracturinghave proved successful inproducing large quantitiesof crude from shale, as

well as natural gas liquidslike ethane, butane andpropane. Since January 2007, horizontal drillinghas tripled its share of total activity to 59 percentof all active U.S. rigs. The

multilateral horizontal wells and multiple com-pletions now being usedare expensive, and they increasingly have left therig count of 2012 discon-nected from service com-pany revenues.

•Thestrongfinancialincentives to drill for oil,and the new technology to do so, have promptedU.S. drilling to swingfrom gas-directed to oil-directed rigs. BetweenDecember 1999 andDecember 2008, 83 per-cent of active U.S. rigsdrilled for natural gas.

Today, only 39 percent of working rigs are directedto natural gas, and recentlow natural gas priceshave accelerated the trendto more U.S. oil explora-tion and production.

In summary, drilling hasgravitated to oil away from nat-ural gas, technology to horizon-tal away from vertical, and as aresult, revenues for service com-panies are much higher than therecovery of the rig count mightindicate. The key to sustainingthe current level of activity andrevenues is a high oil price.

Downstream, refiners havealso been handicapped by a

weak domestic market. A majorexpansion of refining capacity in the U.S. in recent years, plus

weak U.S. demand, has turned

U.S. refiners into significantexporters. Strong demand for oilproducts abroad has made thispossible, with Asia and Europeas the major destinations.Exports of finished petroleumproducts from the Gulf Coasthave more than doubled since2005 to over 576 million barrelsby 2010. By far the strongestgrowth has been in distillates,

followed by exports of conven-tional gasoline.

The petrochemical industry has been revitalized by low nat-ural gas prices. Five years ago,

Figure 3

U.S.-Marketed Natural Gas Production Has Grown Rapidly Since 2005

Billion cubic feet*

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

’11’09’07’05’03’01’99’97’95’93’91’89’87’85’83’81’79’77’75’73

* Six-month average.

SOURCE: Energy Information Administration, Department of Energy.



25

Figure 4

U.S. Real GDP per Capita

2005 dollars

NOTE: Shaded bars indicate U.S. recessions.

SOURCES: National Bureau of Economic Research; Bureau of Labor Statistics; author’s calculations.

Figure 5

U.S. Coincident Index Hits Bottom in June 2009, Recovery Is Slow

Index, 2004 = 100

201120102009200820072006

95

100

105

110

SOURCE: Conference Board.

petrochemicals were thought tobe a dying U.S. industry, slowly shrinking back into the Houstonarea. It was widely believed that

we would never see anothermajor petrochemical plant builtin the U.S. Today, the grow-ing supplies of natural gas from

shale, coupled with the lowprice, have made the U.S. ahighly competitive producingregion. The rest of the worldoutside North America uses oil-based naphtha to produce pet-rochemicals, while the U.S. usesnatural gas liquids. The priceadvantage for natural gas overoil gives the U.S. a definite edgeand opens many new export

opportunities. Announcements have been

made recently of 10 major U.S.ethylene projects—plant expan-sions or new construction—witheight on the Gulf Coast and twoof those in the Houston area.These projects will be supportedby new fractionation plants,pipelines and other facilities. A

wave of heavy construction is

just ahead for the petrochemicalindustry in Texas and Louisiana.

U.S. Provides Little Stimulus to

Houston

The U.S. economy’s recov-ery from the Great Recessionhas been slow and uneven.The best and broadest measureof the U.S. economy is grossdomestic product (GDP), andthrough 10 consecutive quarters

of recovery, the annual averagegrowth rate has been only 2.4percent. Before the crisis, thepotential long-term U.S. growthrate was put at 3.0 percent ormore, which is slower than whata postrecession economy withso many slack resources—8.5percent of the workforce unem-ployed and 35 percent of factory capacity unused—should be

capable of producing. Although GDP has reached

recovery levels in the senseof having returned to theprior peak, it is still debatable

whether a healthy economicexpansion is under way. Simply allowing for population growthin the more than four yearssince the previous GDP peak,GDP per capita is still 2.5 per-cent short of recovery ( Figure

4 ). Further, the National Bureau

of Economic Research (NBER)tracks the business cycle usingan index composed of fourindicators that are coincident

with the business cycle: payrollemployment, personal incomeless transfer payments, industrialproduction, and manufacturingand trade sales ( Figure 5 ). Thatindex is used by the NBER todate the beginning and end of

recessions, but it offers no datefor completing a recovery andbeginning a new expansion.However, the coincident indexis still 4.5 percent short of theprior peak, meaning only 40percent of the gap between the

June 2009 trough and the prior

peak has been closed. Only one of the four coincident com-ponents has reached recovery levels—manufacturing and tradesales—while the other threeremain 4.0–5.0 percent short of recovery.

What should our expecta-tions for recovery be? A recentarticle by Mark A. Wynne exam-ined 88 countries that had expe-

40

45

50

55

60

20102005200019951990

Peak of $57in 2007:Q4

As of2011:Q4,still 2.5%

belowpeak



For more information or copies of this publication, contact Bill Gilmer at

713-483-3546 or [email protected], or write Bill Gilmer, Houston Branch,

Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is

also available on the Internet at www.dallasfed.org.

The views expressed are those of the author and do not necessarily reflect the positions

of the Federal Reserve Bank of Dallas or the Federal Reserve System.

rienced a financial crisis and thepath of GDP that followed thecrisis.3 There was a strong ten-dency for these countries not toquickly revert to trend growth,but to fall behind trend over aperiod of several years and by an average of about 8 percent.

The U.S. has now experi-enced its first real financial crisissince the Great Depression, and

Wynne shows that the behaviorof U.S. GDP since the crisis hasclosely tracked the average of those other 88 countries, mean-ing that our pattern of frus-tratingly slow growth is quitelikely what should have beenexpected.

We can look closely at theU.S. and see large segments of the economy still trying to workthrough the aftermath of 2008.For example, we should bebuilding a million or more newhomes per year in the U.S. in ahealthy economy, and today weare building only 400,000. Withhigh rates of foreclosures andhome prices still falling in many

markets, a near-term turnaroundin construction seems unlikely.Or look at the U.S. con-

sumer, with a debt-to-incomeratio of 90 percent in 2000,peaking at 130 percent in 2008,and so far only worked down toabout 110 percent. This meanscontinued constraints on house-hold spending as deleveragingcontinues.

Finally, before the crisis, we were selling 16 million vehiclesper year; today, we are selling13 million, with forecasts of 16million still several years in thefuture.

Thus, Houston can counton only limited economic stimu-lus from the U.S. economy in2012, as the nation continues tomake significant repairs in the

wake of the Great Recession.

Consensus forecasts such as theBlue Chip place 2012 U.S. GDPgrowth at less than 2.5 percent,slowly accelerating to 2.7 per-

cent by early 2013. Continuedstrong growth in Houston mustcome from rapid growth abroador from energy.

Conclusion

The four pillars of Hous-ton’s economy have traditionally

been aerospace, medicine, andupstream and downstream oil.For the present, aerospace hasbeen sidelined by the end of theshuttle program, continued lay-offs in the Clear Lake area anduncertainty about the future formanned space flight. Construc-tion at the Texas Medical Centerhas come to a halt as we waitfor rules to clarify health care

reform. Hence, energy has beenthe key driver of economic activ-ity for Houston in 2011 and willlikely continue that role in 2012.

There is less external stimu-lus for Houston’s growth in2012. The U.S. economy seemsunlikely to gain momentum, andthe global economy will againcool in 2012. A mild recessionin Europe, a stronger dollar anda modest cooling of the emerg-ing markets would take someof the steam out of oil prices.None of this would close thedoor on another solid year of local growth.

But still looming are big-ger problems, such as a finan-cial crisis in Europe, a sharperslowdown in emerging marketsor a steep decline in oil prices.These are the risks that can halt

even the strong momentumHouston has built up over thepast two years.

—Robert W. Gilmer and Jesse B. Thompson III

Gilmer is a senior economist

and vice president at the Fed-

eral Reserve Bank of Dallas,

and Thompson is a business

economist at the Bank’s Houston

Branch.

Notes1 “Riding a Wave”, by Thomas Helbling,

Valerie Mercer-Blackman and KevinCheng, Finance and Development , vol.

45, no. 1, 2008.2 “OECD Economic Outlook No. 90,”

OECD Economic Outlook: Statisticsand Projections database, December

2011.3 “The Sluggish Recovery from the

Great Recession: Why There Is No

‘V’ Rebound This Time,” by Mark A. Wynne, Federal Reserve Bank of

Dallas Economic Letter , vol. 6, no. 9,2011.

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