Projected Growth Tumbles With Oil Prices by James McClister January 21, 2015

In light of the falling price of crude oil, Credit Suisse sees 2015 – and possibly 2016 – as a year of relative decline.

The glory of Texas is built on a foundation of oil. Slick, black bricks of liquid gold have long since supported the prominence of the Lone Star State, helping to elevate Texas’ economic standing among its neighbors, both domestic and abroad. The potent injections of energy investment have been a particular boon to Houston, which owes much of its recent growth to the last several years of record high crude prices. However, research provided by financial services company Credit Suisse revealed that in light of sharp oil price declines, Texas growth is poised for a significant hiccup that could see declines spanning as much as two years or more.

Since June 2013, oil prices worldwide have plummeted 57 percent. As a result, Credit Suisse estimates the energy industry will reduce capital expenditures by 35 percent year-over-year in 2015, which will pressure employment growth in the markets surrounding prominent oil and shale fields, such as Houston, Dallas, Austin and San Antonio. The Dallas Fed estimates that Texas could lose as many as 125,000 jobs in the first half of 2015.

Already, employment in Houston has suffered tremendous losses: Apache announced its intentions to cut its workforce by five percent; Haliburton is shedding 1,000 employees; BP will layoff 200; and Lewis Energy, responsible for deep drilling, has decided it will need to cut employment by a whopping 20 percent. But employment is only one piece of a larger, more daunting puzzle for Texas.

A Hit to Building

When oil prices first started to tumble in mid 2014, the early word was they would soon level out. But as OPEC failed to reach production curbs, prices continued falling and now it seems it might be some time before they’re back on familiar footing; and even then, many are speculating prices may never again break $100 per barrel.

Faced with the reality of an indefinitely crippled energy market, Credit Suisse recently revised its 2015 forecast for Texas, particularly in regards to building. The financial group says that where it was once projected local builder’s to increase single-family home starts by as much as 12 percent in the new year, starts are now expected to decline by 20 percent, and a further 4 percent in 2016.

In a year-over-year comparison, single-family starts are still expected to rise by 6 percent in 2015 and 9 percent in 2016, but are down from earlier projections of 8 and 10 percent, respectively.

As Bad as It Seems?

While the initial diagnosis is disheartening, Credit Suisse identified a number of encouraging factors that might help to offset declines. Researchers see regulatory initiatives from the Federal Housing Administration, namely the organization’s decision to lower mortgage insurance premiums, as a means to dampen the financial impact.

“Mortgage rates have decreased by 50 basis points since September, and now sit at the lowest level since May 2013,” the report reads. “Additionally, we anticipate the recent reduction in FHA MIP will have meaningful impact on first-time buyer activity, as prior affordability challenges ease.”

Furthermore, falling oil prices are likely to leave something of a silver lining, as residents in outside industries benefit from persisting low energy costs. With expanded personal budgets, consumer confidence is expected to profit as a result, and improved savings should allow for more substantial down payments from hopeful buyers in 2015.

Experts are split on how far oil prices will ultimately fall, and whether they’ll remain at those levels, but we’ll be following the situation closely and will provide updates as they become available.