First oil & gas, then construction, then new vehicle sales
That the Houston economy – however diversified and huge it may be – got hit hard by the oil bust is an understatement. The oil & gas sector created not only a lot of high-paying jobs, many of them tech jobs, but also kicked off an enormous construction boom in the office sector. A chemical-plant construction boom followed. This came on top of a nationwide healthcare construction boom. The construction industry was on cloud nine!
But now the office sector is drowning in empty space on the sublease market even as new towers are being completed. The chemical-plant construction boom peaked in early 2015. Construction projects are being cancelled and put on hold, and the entire construction sector has collapsed.
In January, nonresidential construction starts plunged 44.7%, from $1.05 billion to $580 million, according to data cited by Greater Houston Partnership. While residential construction starts rose over the 12 months through January, total construction starts – residential and nonresidential – are down 23.6% for the 12-month period, compared to a year earlier, to $14 billion. Within a year, the construction business went from blistering boom to collapse.
Construction booms of the magnificent kind that Houston experienced after the Financial Crisis boost the local economy in many ways, from raw materials to labor, and they support a wide variety of other sectors, such as the retail and restaurant sectors – and auto sales.
Employment in the goods producing sector, which include the high-paying jobs in construction and oil & gas, fell 4.5% in February year-over-year and 6.5% year-to-date. But total employment, with support from hiring by government entities and the service sector, has been about flat.
While total retail sales in Houston dropped “only” 4.7% year-to-date, new vehicles sales crashed. Everything in its own time: first oil & gas, then construction, then new vehicles. For auto dealers it’s a brutal reality
Auto dealers in the Houston metro sold 21,434 new vehicles in February, down 20.1% year-over-year, according to TexAuto Facts, published by InfoNation, and cited today by Greater Houston Partnership. It was the 14th month in a row of year-over-year declines.
For the 12-month period through February 2017, dealers sold 294,214 new vehicles, down 21.5% from the same period a year earlier. It was the lowest 12-month total since the 12-month period through May 2012.
This chart of rolling 12-month new vehicle sales shows the collapse during the financial crisis, the boom afterwards, and the current collapse (via Greater Houston Partnership, red marks added):
Car sales in February plunged 28.9% to 7,255 vehicles; truck sales dropped 14.8% to 14,179 vehicles.
Ironically, or perhaps not so ironically, the average retail sales price per new vehicle in February hit an all-time record of $36,755. This is in part caused by the continuing shift from cars to larger and more expensive trucks and SUVs, which account for 66.2% of total sales in Houston – compared to the national average of 62.3%, according to AutoData.
Houston’s hosting the Super Bowl was also blamed for the February debacle as apparently fears of traffic congestion kept car buyers at home or focused on other things. It turned that weekend into a particularly morose affair for car dealers. But that one weekend doesn’t have much impact on the rolling 12-month total sales, which are still in free fall.
There are about 175 new car and truck dealers in the Houston Metro area, with over 30,000 employees, according to the Houston Automobile Dealers Association. It’s big business. But this is how the oil bust reverberates through an economy that is still uncomfortably dependent, despite all efforts of diversification, on the oil & gas sector.
The Fed is way behind the curve, but at least it now acknowledges seeing the curve. Read… Inflation Hits Consumers, Mortgage Rates Take Off, “Financial Repression” for Bondholders and Savers
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175 new car and truck dealers with over 30,000 employees.
Is that right as it equates to about 170 employees per dealership. Seems a lot.
Yes, so it seems, but the numbers are from HADA themselves: http://www.houstoncardealers.com/
Our dealership – single franchise – had 250 employees. New, used, F&I, make-ready, parts & service, body shop, rental, office… it adds up.
To get a feel for what it is like behind the scenes, read my book TESTOSTERONE PIT (it’s short and funny):
https://www.amazon.com/gp/product/B009NOFGXA/
I’ve posted this before. The local Honda, Toyota, Nissan dealer has what I estimate to be 500 new cars parked in the mall parking lot adjacent to the dealership-buried in snow and not going anywhere, anytime soon. I see this at every dealership in the state I live in- new cars parked in lots around or nearby to the dealerships. Literally tens of thousand of cars in a state with a population of only about one million
What state is that?
Wolf .. I can’t answer for Begbie [ though Ill take a wild guess VT ] but here on the Front Range [ CO ] the situation is the same . With all the ( not so ) Big Three’s dealerships primary secondary and in some cases third lots full to the brim and Toyota , Nissan and VW dealerships not far behind . In fact about the only dealerships on the Front Range in either reasonable or short supply are Subaru , Mercedes and to a lesser extent BMW dealers . Fact is if you’re willing to buy off the lot deal making has become a wild west free for all for anyone with reasonable negotiating skills and good credit/cash
Maine. I live in probably the most affluent town in the state. Can’t think of any of my neighbors who are driving new cars in the last several years
Indeed. It’s an entertaining read.
But you are left with this feeling that the next time you walk in to a car dealership you should wear a bio-hazard suit.
I bought a car since I wrote the book and I got the same treatment, including the four-square and the dance with the managers. It was funny, actually.
(175 new car and truck dealers with over 30,000 employees.)
I think 100 of them are on the Southwest Freeway.
(That the Houston economy – however diversified and huge it may be)
They like to think they are diversified, but the oil bidness revolves around Houston, always will.
From what I’ve heard, a lot of the sales of new vehicles were based on sub-prime lending. So, if industry tanks, can the “owners” of those cars continue to make their payments ? I guess we’re gonna find out. If not, it’ll be repo time. How the dealers will dispose of the repoed vehicles without crippling the car companies and their supply chains remains to be seen. One thing though, it won’t be easy.
Defaults and missing payments are up for sub-prime car loan borrowers. Great again I guess if you are short this mess.
” How the dealers will dispose of the repoed vehicles without crippling the car companies and their supply chains remains to be seen.”
Export them, among other things there is no Repo information on the title or sale in a used exported Repo. and its another vehicle out of the local market without scrapping it.
Late model truck units, are still worth converting to RHD in some countries that require that, also.
US dealers have done sale or return (which equals sale or no reserve auction in your market) supply, in their used stock gluts before.
I cannot see why the Fed should raise interest rates now. They should instead lower interest rates to help the market. Oil is down and inflation will be soon below zero. Atlanta GDP now at 0.9% GDP growth for 1Q17 – if this goes on we will be below zero growth at the end of the month. There is no need to raise interests now – in the contrary it is harmful and the FED is way too early.
They have to raise the rates … and in fact have needed to raise them for months/years . Suffice it to say the primary tool in the Feds toolbox to help mitigate a recession is to lower rates . And with rates as low as they are … when .. not if the next recession / potential depression hits they’ve got nowhere to go except subzero which would prove to be a disaster . So either they raise the rates to a more realistic level dealing with the consequences now … or leave them as as with the potential for devastating consequences later . As I’ve posted on another site the raising and lowering of interest rates is a Goat Rodeo on the best of days .. meaning no matter what they do there will be hell to pay leaving the only logical choice of choosing the lesser hell which is the necessary evil of raising those rates .
Oil prices may be falling but still grossly inflated…. Just like housing, autos and every other commodity. Current interest rates should be in the 9-12% range. It’s coming.
Yeah, the line at the end of this about the fed being behind the curve is laughable. Their whole shtick is to enrich their puppet masters (in in the process destroy the economy) and as such they are more than ahead of the curve. Once you realize their true intent, everything they do makes sense. Same with any marxist action – rail systems to nowhere, insolvent pensions, you name it. Failure by design.
http://www.spirit.kauwila.net/wordpress_kauilapele/creature-from-jekyll-island-by-edward-griffin.pdf the FED is no more “Federal” than FedEx. It’s a private banking cartell and what went down in 1913 was the heist of the millenium. Leaving the purchase of Manhattan with some glass marbles behind.
Terrible recessions have been fabricated by the banksters.
GS paying about 1% tax on their billions in profit. Who was the tax code written for?!?
The White House is the tail, the FED is the dog, IMHO. Way more poverful than whoever plays the role of president!
Imagine having an income of $50K a year from Guaranteed Investment Certificates a few years ago, and having an income of $5K now, and that at a reduced purchasing power because of inflation (which supposedly is less than 2% but is really probably over 5% per year, despite what the fraudulent CPI claims).
Now that’s what’s harmful, and there are a lot of people in that boat after carefully saving and investing over their working career.
Extreme low interest, centralized by committee without regard to regional differences in economic activity (or lack of it) invites speculation and frivolous purchases.
http://davidstockmanscontracorner.com/lies-damn-lies-and-bls-statistics/
The Fed is playing with mirrors. They want it to appear that the economy is healthy enough for a 1/4 pt interest rate hike. A few sectors of the economy fit that criteria, but in general the US economy is sinking into depression again. They know this, but again they want the public to think they think everything is good.
Mike R.
I guess, the FED is playing the strong currency/economy game. Reagan/Volker invented it and Greenspan as well as Trichet tried to play it also with mixed results. Greenspan popped the high tech bubble in 2000 with this strategy and Trichet sunk Greece and southern Europe into depression.
My view is that this strategy cannot work, because exporting countries are loaded up to their eyeballs with currency reserves – mainly in USD. Back then in the Reagan times exporters had to scramble for dollars when the dollar rose, creating an upward spiral into USD assets, which helped the US economy despite a strong dollar and high interest rates.
Today, China just sells a few hundred billions out of its vast reserves. The same for Singapore, Hongkong, South Korea, Taiwan and other South East Asian countries, which own combined at least 2 trn USD in foreign reserves. So, a strong USD does not create an Asian panic today. Besides that, many companies can finance themselves in Euro very cheaply, so a strong dollar does not create a rush for dollar assets this time. This is why I think the strong dollar strategy does not work this time and the FED runs into danger to crash the US economy against a wall.
A strong USD don’t creates panic, it’s an opportunity for them. It makes their products cheaper to export to the US. Until the average American runs out of reserves. And than these Asian exports will collaps. And i think it will happen soon. Trade deficit is going up in the US, so more money goes to other countries. Debt levels are high, so more money is needed to pay that back.
What happened to the chemical plant production boom that you’d expect after a C.P. construction boom? Trapped under the dead consumer market? I could believe that.
I fail to comprehend how this can be considered inflationary.
Consider this: the average transaction price was the highest on record.
I ‘m not surprised vehicles cost more now than ever, despite it’s my observation the durability has slipped in the true bean counter manner.
Older news, but: Detroit News, 12.18.2016:
“… GM at the end of November, … had a 168-day supply of the LaCrosse; 177 days of the Camaro; 170 days of the Corvette and Chevrolet Spark; 121 days for the Cruze; 119 days for the ATS; 132 days for the CTS; and 110 days for the CT6, according to Autodata.”
Since then, I’ve seen figures as high as 223 days for Buick, and overall 123 days for autos.
60-70 days is considered healthy.
I still do not see any material weakness in operating results from Autonation or Carmax last quarter. However, it did look like they hit a bump or two earlier last year, but surprisingly, they came back to report decent enough results….. I’m still trying to connect the dots, i suppose.
And it is important to avoid either way confirmation bias. It’s so easy to fall into that trap.
The boat that hit an iceberg a century ago was not the Titanic but its injured sister ( a Morgan bait and switch) however the night watch must have been a bit more concerned than the rest of the crew and passengers after seeing his first iceberg that fateful night…… Brace for impact!
Taking from Joe to give to Janet’s planet!
To any deluded Keynesian the boom was “growth”.
To anyone with any commonsense it was cheap credit-induced capital misallocation.
Mean reversion in progress…
Northwest Mall in Houston is shutting down all stores that don’t have their own exterior entrances (45 of 50 stores), by the end of this month. The Houston Chronicle reported the same day (Tuesday) that Houston is projected to have the highest office vacancy rate in the country at 21.5%.
OKay so……..
I wanna buy a new super duty F350 4X4 6.7 lariat or platinum.
So……..How do I go about it to get the best deal.
Thank in advance