Quarterly report

Uncertainty still clouds local economic outlook

By L.M. SIXEL
HOUSTON CHRONICLE

Jan. 30, 2010, 5:20PM

If one word captures the economic mood in Houston, it's uncertainty. And that's not a comfortable place to be, according to interviews with local business leaders who are eager to get a better handle on the strength and direction of the economy.

While it's fairly clear the Houston area hit bottom last summer and is starting to stabilize, other factors are keeping business lead-ers up at night. One concern is new federal taxes, they say, along with the mounting financial problems of local and state governments. And it's not clear how far Congress will go in attempting to reduce greenhouse gas emissions and how costly those measures will be. And banks, with their own concerns over new fees and bad debts, aren't doing much lending.

That uncertainty is choking growth, some say, because businesses don't want to hire employees and launch products until they know what they'll be paying in taxes and fees. That is also causing consumers — who are already inclined to save and hoard after last year's job losses — to shun spending any more than they must.

We asked a real estate economist, an executive recruiter, a chamber executive, a purchasing manager and a finance professor for their thoughts on where Houston is headed. Here is what they said:

Q: Do you see signs the Houston economy is improving?

A: Yes, said Stephen Newton, managing director and head of the Houston office for the executive search firm Russell Reynolds.

Energy clients are seeing greater stability in the price of oil and, consequently, they're making some senior-level hires, he said. He's also seeing some renewed confidence in financial services and retail, especially the big retailers.

Companies cut deeply in 2009, Newton said. They've boosted productivity, but they're finding they can't do as much with fewer employees.

“It's a repeat of a cycle of what we've seen before — over-cut and then hire aggressively when the business comes back,” he said. But he said companies seldom rehire as fast — or as much — as they trimmed.

Mike Valant, business survey chairman of the National Association of Purchasing Management-Houston, also sees signs of growth. The group surveys 80 to 85 companies each month on sales, production, employment, purchases, prices, lead times and finished goods inventory.

December marked the ninth consecutive month of increases, he said.

The sales category was a highlight in December, up significantly from just a month earlier. Prices are also rising, he said. “When things get good, prices go up.”

Mark Dotzour, chief economist and director of research for the Real Estate Center of Texas A&M University in College Station, is optimistic because corporate profits are rebounding.

“That tells me the private sector right-sized sufficiently in this economy,” he said. “The need to continue to lay off is gone.”

The biggest risk that could derail the growth is budget pressure on governments and school districts as they cope with declining sales and property tax revenues, he said. That could force them to cut their costs — including work forces — to balance their budgets.

The good news for Houston is that while commercial real estate values are down substantially, which means reduced local property tax revenue, local home values are stable.

Q: What will it take for employers to begin to feel more comfortable about hiring?

A: Uncertainties need to be removed before hiring can begin, said Joe Ueng, professor of finance at the University of St. Thomas.

Will the Federal Reserve continue its low interest policy? For how long? How about government spending? And will taxes go up?

“Investors and companies are scared,” he said. “They are not sure what will happen.”

In a world with so much uncertainty, business people go to the sidelines, Dotzour said.

“They don't hire anybody, they don't merge or acquire anybody, they just hoard cash,” he said.

The job creation that will lead this country out of recession will come from small businesses and entrepreneurs, Dotzour said. But until business people can see their future more clearly, they will continue to hesitate to do anything.

That means knowing what income tax rates will be, whether the government will impose costly caps on carbon emissions and whether the energy industry will face a windfall profits tax, he said.

Q: Is the credit crunch affecting Houston's ability to grow?

A: Access to capital is still the big problem, said Eric Lyons, president and CEO of the Houston Citizens Chamber of Commerce, which focuses on promoting African-American owned businesses.

“It's not there,” Lyons said. “It's impeding our growth.”

Dotzour agreed.

Small businesses need loans from banks to expand, he said. But banks have suffered so much damage from bad real estate loans, home equity loans and unpaid credit cards that they're reluctant to lend.

The inability to borrow also hurts companies that want to take advantage of buying opportunities, Newton said. Either the money isn't there or it's prohibitively expensive.

Newton said he met recently with executives of an oil field services company who want to buy some smaller competitors, but in today's economy, they can't justify the investment because the cost of credit is too high.

Q: Which sectors in Houston will be the first out of the recession? Which will be the last?

A: The first: transportation infrastructure-related industries, said Lyons, who is betting the expansion of Metro's light rail line will give Houston a boost.

Ueng, Newton and Valant point to Houston's medical industry, which is less sensitive to the economy. The professional and business services — specifically engineering and management consulting — will be among the first, Dotzour predicted. Houston has a good reputation in those areas.

Q: And the slowest to recover?

A: Retail, because people aren't spending money, Lyons said. “Don't expect that to change,” he said. “Saving money is the big thing right now.”

For the same reason, Newton is predicting that sellers of big durable products — like cars and appliances — will face a longer slog than other businesses. Consumers are not into taking on new debt.

Nor are they into trading up their homes, he said.

That will keep the construction industry from rebounding, Dotzour said.

Q: What is the biggest economic challenge facing Houston?

A: Slower traffic at the Port of Houston and the airports, Valant said. The local economy would be doing better if it had more goods coming in and more robust air traffic.

For Lyons, it's the high number of foreclosures.

“It goes back to retail foot traffic,” he said.

People spending all their money trying to keep up mortgage payments can't afford a new dress or suit.

Newton sees the area's biggest challenge as maintaining a high-quality, trained work force.

While Rice University is world class and he expects to see great things from the University of Houston in years to come, Houston still doesn't have a history of higher education like Boston, Philadelphia and New York.

In those cities, graduates of the top-tier universities tend to stay and work, which spawns creative companies doing innovative work.

Transforming Houston into a similar higher education mecca is important for another reason — so it can retain its role as the energy capital, especially in alternative energy.

“We do not have a lock on that business today,” said Newton, and Houston's bid for a top role will depend on the quality of its graduates.

“Top-tier schools breed top-tier entrepreneurs, which creates the jobs and the industry,” he said. “Complacency is our biggest risk.”

nancy@callnancyfurst.com