By the time this article is published, nearly one month will have passed since Patrick Jankowski gave an early March luncheon presentation on the Houston Region Economic Outlook to members of the Bay Area Houston Economic Partnership. Jankowski is senior vice president, Research, for the Greater Houston Partnership where he has been on staff for 37 years. Under normal circumstances, the economy doesn’t change much over just four weeks, but Houston, along with the rest of the world, is not operating under normal circumstances.
To better understand the potential economic consequences of the coronavirus, it is arguably good to first get an overview of the economy as it stood before the worldwide spread of the disease. When Jankowski began his presentation, he noted that he had been getting many questions about the coronavirus which he said he would address as well.
OPEC to expand production cuts
Important to the Houston region, Jankowski noted, was the Dec. 6, 2019, decision by OPEC to expand production cuts by an additional 500,000 barrels per day to increase the price of Brent Crude in preparation for its Aramco IPO (a $1.88 trillion value). That increased the total cut to 2.1 million barrels per day.
A number of OPEC and non-OPEC members were not willing to comply with this decision. Jankowski said that Russia and Saudi Arabia are trying to manage the market, but the U.S. will keep producing as much as it can as fast as it can. He added that Russia and Saudi Arabia’s inability to agree has definitely affected prices in light of the effect of the coronavirus and the resulting global slowdown.
Jankowski checked the price of West Texas Intermediate before getting in his car to drive to the luncheon, and it was at $45 a barrel. "Anything below $50 is really painful. Ideally we want it between $55 and $60,” he said.
U.S., China sign trade deal in January
On Jan. 15, 2020, the U.S. signed a trade deal with China. China agreed to purchase more agricultural products, automobiles, industrial equipment, and energy which were included on a 15-page list of the things that China said it is willing to buy amounting to another $200 billion in purchases.
China has agreed to allow U.S. firms easier access to its financial markets and offered some intellectual property protections. China benefitted from the trade deal by getting a halt in any further escalation of tariffs along with some tariff reductions.
Jankowski offered that it really wasn’t an end to the trade war. It was more like a cease fire with further negotiations to take place. He added that he didn’t foresee negotiations taking place before the November election.
The big concern is, according to Jankowski, whether China will be able to hold up its end of the deal because of the coronavirus. If the Chinese economy shuts down, they won’t need to buy additional products.
The Fed looking at lowering interest rates
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), met on Jan. 28, 2020, and left interest rates unchanged saying that it was too soon to gauge the impact of the 2019 rate cuts. The committee is keeping an eye on the impact of the coronavirus but was not, at that time, concerned about a U.S. recession.
Jankowski added that when the U.S economy does well, the Houston economy does well. It is also important to Houston that the global economy does well. He said that much had changed since the January meeting of FOMC, and the Fed is now concerned. He reported that the Fed just that morning was looking at lowering rates to counter the effect of the coronavirus, and the markets had a very positive reaction to that announcement.
USMCA agreement signed, UK leaves EU
On Jan. 29, 2020 a U.S. Mexico Canada Agreement (USMCA) was signed. USMCA is the replacement for NAFTA (North American Free Trade Agreement). The U.S. benefitted with higher North American content in autos, increased access to Canadian dairy markets, protections for digital trade and ecommerce, and the addressing of environmental and union concerns.
The trade agreements with China, Canada, and Mexico, Jankowski said, are especially important to Houston, because we need to have a strong global economy to offset the weakness in the oil and gas industry.
On Jan. 31, 2020, the United Kingdom withdrew from the European Union. Houston has a lot of UK investment in the region, and it is a major trading partner. The week following the withdrawal, there were ministers from the UK government in Houston talking about trade deals and investments. Jankowski said that the impact on trade and investment is yet to be determined, but he feels that it will have a positive impact for Houston.
Coronavirus affects all but one continent
Of course, the coronavirus is on everyone’s mind, he continued. On Jan. 30, 2020, the World Health Organization (WHO) declared the coronavirus to be a public health emergency. (Update: On March 11, 2020, WHO declared the coronaviurs to be a pandemic. A pandemic is defined as sustained outbreaks in multiple regions of the world.)
Jankowski recited the extent of the outbreak as of March 1st, but the actual numbers are virtually unknown. Every continent except Antarctica has been affected. Jankowski emphasized, "There is so much uncertainty out there, there’s so much fear out there, and there’s so much misinformation.”
In regard to how the coronavirus is going to affect the economy, he said, "How do you model something that you know so little about? We don’t have enough data to know what’s going to happen. The International Monetary Fund cited the fact that in a typical pandemic, 90 percent of the economic impact is the result of people’s actions when they are trying to avoid coming into contact with other people.” Jankowski said that there are valid concerns. He noted, "If the global economy slows down, we’re not going to have the same level of production and output. My biggest concern about the Houston economy is how the coronavirus is going to affect the oil and gas industry. Upstream is already struggling. The financial markets have become so displeased with the oil and gas industry that they’ve pretty much cut off all lending to them.
"A lot of money for exploration was going to come out of cash flow this year. When you go from a $55 barrel of oil to a $45 barrel of oil, your cash flow is really crimped. You’re probably going to see a 10-20 percent decrease in exploration activity this year if oil prices don’t pick up. Some firms can’t service their debt at $45 a barrel; so, you’re going to see some more bankruptcies. The biggest negative impact on Houston would be the fact that the coronavirus is going to depress the demand for crude which is going to depress prices which is going to have an impact on us.”
U.S. experiencing good growth rate
The good news is that the U.S. economy is growing at 2.1 percent, which is a good growth rate according to Jankowski. The fact that the U.S. economy is growing is good for Houston. In January 2020, 225,000 jobs were created nationally, which is another sign that the U.S. economy will continue to do well. He stated again that the trade agreements that are in place should help the U.S. economy.
Jankowski also spoke of new office construction and vacancy rates, new and proposed multifamily units, Houston vehicle sales, sales tax collections, and metro Houston job growth.
He summarized his presentation by saying that Houston’s short-term challenges are the coronavirus and the global slowdown. Its long-term challenges are an overbuilt real estate market and managing the energy transition.
WHO advises …
Jankowski ended his talk by stressing that WHO asks that you …• Wash your hands frequently.• Avoid anyone who’s coughing or sneezing.• Avoid touching your eyes, nose, and mouth.• If sick, seek medical care early.• Stay informed.