Strong Houston Area Economy Challenged by Trade Tensions and COVID-19

March 17, 2020

Ranked No. 18 on ThinkWhy’s LaborIQ™ Rankings Index, the Houston-The Woodlands-Sugar Land, Texas metro area experienced 2.8 percent job growth in December 2019, based on the most recent data available from the Bureau of Labor Statistics.

Unemployment in the nation’s fourth-largest city sits at 3.6 percent, and the labor force continues to expand, as Houston has experienced rapid growth in recent years. While the metro may be best known for its energy industry, its economy is increasingly diverse. Robust sectors include medical research and healthcare, international trade and high technology. Tariff wars and COVID-19 fears will depress growth in the market, though the most dramatic effects may be limited to a few sectors.

Houston Skyline

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The Houston Employment Landscape:

  • Unemployment ticked down to 3.6 percent in December.
  • Strong job gains in employment in non-durable goods manufacturing.
  • Global economic conditions, including trade tensions and coronavirus concerns, dampen the oil and gas and international trade sectors that are key to the metro’s success.

Houston Oil Refinery

The number of jobs in Houston increased in December by 2.8 percent, as 88,000 jobs were added, bringing the labor force increase to 63,900. This marks 34 straight months that job growth has accelerated. According to the Greater Houston Partnership, China’s demand for crude oil decreased, contributing to a slump in the metro’s energy sector, along with production cuts by OPEC. As a result, crude oil prices dipped, fewer wells were drilled and fewer jobs were created in the oil and gas industry.

International trade, which is a substantial contributor to Houston’s economy, also took a hit, as trade tensions with China loomed and prospects for investment in Mexico faded some. Mexico is Houston’s No. 1 foreign trading partner, and China is No. 3.

Houston businesses can:

  • Focus on hiring that will support the U.S. domestic business sector, as opposed to international trade and energy export.
  • Adjust staffing levels in preparation for short-term export/import volatility.
  • Run outage scenarios – for both labor and the supply chain – and prepare contingency plans.
  • Leverage Houston’s growing tech expertise to boost capabilities in advanced manufacturing.
  • Establish emergency management policies to improve response time in the face of disease outbreaks and international economic shocks.

Average Hourly Earnings Growth (all private employees, December 2019)

Average hourly earnings decreased 2.7 percent in December, settling at $27.67. This was the biggest drop since August 2016. The decrease may cause some companies to pause hiring plans but others to accelerate theirs. Additionally, the Bureau of Labor Statistics reports that wages and salaries rose only 1.6 percent in 2019 in Houston. This was the nation’s second-slowest growth rate, behind Seattle. Workers won’t be incentivized to come off the sidelines because employers are not being forced to offer higher wages. At the same time, retaining highly skilled and educated workers in high tech, for example, may require special incentives. Federal Reserve interest rate reductions may help businesses lighten their debt loads, putting them in a better position to capitalize on any economic growth. It will be critical for organizations in the metro to be ready to respond when trade levels return to normal.

Unemployment Rate (December 2019)

The December unemployment rate in Houston stood at 3.6 percent, down from 3.9 percent in December 2018. The December 2019 rate was the lowest in several years. Based on fourth-quarter results from the Dallas Fed Energy Survey, 66.0 percent of oil and gas firms expect capital expenses to decline or remain unchanged for 2020. Per the survey, monthly oil prices would need to be firm for oil activity and its related labor demand to substantially increase. This could have a significant impact on the metro’s 2020 unemployment rate, especially in the oil and gas sector.

Job Growth by Industry (December 2019)

The largest industry above the metro’s annual growth rate, Professional and Business Services, constituted 16.3 percent of jobs in December and saw 5.3 percent growth in the Houston market. Other Services produced the most percentage growth in the metro in December, corresponding to the equipment and manufacturing repair services required by this robust port and trade hub. The growth may also include the personal care services that a growing population demands.

Houston Metro Table #1

Trade, Transportation and Utilities, the largest industry to perform below the Houston annual growth rate for December, is vulnerable to the recent changes in domestic and international trade. An increase of 1.6 percent is better than the industry’s growth in recent years, but if projections are revised downward and negative impacts from international trade and COVID-19 persist, Houston’s economy may contract more strongly.

Houston is no stranger to the healthcare industry, housing the largest medical complex in the world, Texas Medical Center. Healthcare growth is just under the annual rate. Its importance to the market cannot be overstated, especially during a global health epidemic, like COVID-19.

This MSA is home to industry leaders and business accelerators that are coordinated through the Texas Medical Center’s Innovation Institute. Companies in this space can leverage the need for research and medical expertise to combat current and future outbreaks, discover new vaccines and help guide Houston organizations as they plan for and respond to similar disease scenarios in the future.

The impact to the Houston market from the COVID-19 outbreak appears to be more evident in the blow to international trade than in any boost the market might enjoy in the healthcare space. But the pandemic will no doubt have an impact on both.

Houston Metro Table #2

Cost of Housing (Q4 2019)

The median sales price of an existing single-family home in Houston was $245,700 in Q4 2019, up by 3.3 percent. According to the Real Estate Center at Texas A&M, the metro’s home affordability index hovered around 150, making home-buying feasible for most families in the area. Houston also boasts a low cost of living compared to other large population centers in the U.S., according to data calculated by the Council for Community and Economic Research. The affordability of the Houston metro, coupled with interest rate cuts, will continue to positively impact migration into the area as well as jobs in the Construction industry.

Houston Outlook

Typically, the Houston job market outlook depends on the health of its oil and gas and international trade sectors. It’s important to note that COVID-19 will likely have a significant impact on the Houston economy. This impact will primarily affect manufacturing – likely hampering the sector’s expected strong growth rate – as well as international trade and oil and gas. The pandemic has already tamped down energy demand and may also slow the metro’s domestic migration growth.

Stay current with ThinkWhy, as we update our national and MSA forecasts monthly. Houston’s forecast for job, wage and industry performance will be shifting. The Houston area is expected to continue experiencing positive population growth of 1.2 percent in 2020, with a gain of 87,000.