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FOR IMMEDIATE RELEASE
November 4, 2004

Contact: Angie Joe
713.743.8153 (office)
713.617.7138 (pager)
ajoe@uh.edu

HOUSTON, November 4, 2004 – With oil prices above $50 per barrel, why isn’t Houston’s economy booming?

Barton Smith, University of Houston professor of economics, has the answer.

During his annual economic forecast symposium, Smith discussed the major changes to the regional economy that have altered the relationship between area growth and oil prices. These include the proportionally smaller role of energy in the region’s economic base, the decline in national and statewide production of oil accompanied by an accelerated interest in exploration abroad, the fear by the energy industry that the current price bubble might soon burst, and the fact the many non-energy sectors of the regional economy are still contracting in the aftermath of the national recession earlier this decade.

The UH director of the Institute for Regional Forecasting addressed more than 1000 business and civic leaders at the Hyatt Regency Downtown at his program, “The Changing Face of Houston: Implications for the Future.” He urged his audience to reject simple-minded extrapolations of the past and to recognize that “Houston has always been a city of dynamic change, requiring a constant re-evaluation of just what makes Houston tick.” In making his case, Smith reviewed the structural changes that have occurred within Houston’s economy every decade since oil was discovered 90 miles east of the city at Spindletop more than a hundred years ago.

“No two decades were the same,” Smith said. “Each had different driving forces and different outcomes, and there is no reason to assume that this transformation process will not continue.”

Smith also examined the demographic changes that make Houston different today. Some are commonly understood by Houstonians – such as the dramatic increase in the proportion of Hispanics in the area. However, he also pointed out other important changes that receive less attention such as the aging of the region’s population, the significant decline in metropolitan area family size, the significant increase in “other minorities” of foreign birth, and the dramatic rise in real family income, an increase that was only partially sidetracked by the energy bust of the mid 1980s.

The UH symposium also examined the current state of the local economy, concluding that the recovery is gaining momentum but not as strong as might be expected because of the sluggishness of the national economy. The latter phenomenon, he reports, is due to the continued caution of the American consumer, a phenomenon that was expected and was a part of last year’s forecast. “This year’s local economic performance is right on target with last year’s expectations,” Smith said. “Year-over-year growth is almost 1.2 percent which translates into nearly 25,000 new jobs for the region. I expect that number to be revised upward to some degree when the final numbers are released in February.”

Nonetheless, Smith warned that neither the national recovery nor the regional recovery is like to be as strong as past recoveries.

“There remain too many detriments to growth right now,” Smith stressed. “These include continued worries over terrorism and foreign entanglements, high energy prices, and a pending housing market bust in many parts of the nation.”

With the exception of excess supply in the local apartment market, the residential market in Houston does not suffer from most of the housing market problems elsewhere nor from the speculative bubble that has emerged in some markets, which have pushed homes prices up in many cities by more than 20 percent per year.

“While the greatest vulnerability is within urban markets of the West and East Coasts, the pending housing bust is a threat to Houston because of the sheer size of the national economy likely to be affected. The cities at greatest risk are home to more than a third of the nation’s population and as a consequence a collapse in home prices there will significantly affect the consumer and national economic growth.”

This will affect the Houston economy in which more than 50 percent of its economic base is directly tied to the strength of the national economy.”

On the positive side, Smith indicated that the threat to many of the nation’s large urban housing markets will constrain the Federal Reserve Bank from raising interest rates as far as it might otherwise have done as the recovery matures.

“The ‘Fed’ will be caught been a rock and a hard place,” Smith suggested. “It will want to raise interest rates to protect the dollar and to keep overall inflation in check, but it will be worried that excessive rates hikes will create such a severe home market correction that the national recession could quickly return.”

About the University of Houston
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