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Recession Fears Exaggerated, But Energy Industry To Take A Hit

Fears of an outright recession in the U.S. are receding for 2020, but a downturn in the energy industry is expected to dampen Houston’s growth, several Texas-based economists believe.

Greater Houston Partnership's Patrick Jankowski

Though many commentators have spoken of a recession in 2020, these fears have been blown out of proportion, according to Greater Houston Partnership Senior Vice President of Research Patrick Jankowski.

“The reports of the U.S. economy slowing down and the global economy going into a recession are greatly exaggerated,” Jankowski said.

In December 2019, the National Association of Business Economics released the results of a survey of 53 professional forecasters. The majority of the respondents said the U.S. economy will continue to expand in 2020, but anticipate that inflation-adjusted gross domestic product growth will slow from 2.9% in 2018 to 2.3% in 2019, rounding out at 1.8% in 2020. Trade policy was considered the greatest risk to the U.S. economy.

While the broader U.S. economy and the global economy are in reasonable shape, economists say the energy industry is experiencing a downturn. For Houston, a city with strong ties to oil and gas, this will likely dampen regional economic growth.

“We need the global economy and the U.S. economy to continue to do well because we’re not going to get any help from the oil and gas industry for the next five to 10 years,” Jankowski told attendees at a CCIM luncheon on Jan. 16.

Dallas Federal Reserve Senior Economist Jesse Thompson also believes the energy industry will see a significant slowdown.

“There are a couple of headwinds that are going to limit the capacity of the energy industry to grow, unless something shocking happens to oil prices,” Thompson said at the CoreNet Annual Awards luncheon on Jan. 14.

Thompson predicts there will be limited upside potential from the energy industry for the next two years, leading to limited job growth in the sector.

Texas A&M Real Estate Center Chief Economist Jim Gaines said energy jobs are likely to take a hit, which will have a cumulative effect on oilfield services providers and manufacturers.

However, the outlook for the economy of the energy sector in 2020 will be neutral, Gaines told attendees at the Commercial Real Estate Women luncheon in Houston on Jan. 10. While the return to $100 per barrel oil may never happen, oil prices are unlikely to fall below $45 per barrel this year, he said. In a balanced market, $50 to $60 per barrel of oil is generally considered a sustainable, break-even price for oil and gas producers.

Jim Gaines with members of the CREW Houston leadership at the January 2020 CREW luncheon.

Job growth is a measure of economic expansion, and considered an important indicator of economic health. It is also a good bellwether for growth in the commercial real estate market. As companies increase their headcount, demand for office, retail and residential property also grows.

And while the energy sector may experience volatility, overall regional growth is going to continue.

“The good times are here, and at least based on jobs, income and people, we anticipate over time that’s going to continue for the state of Texas, and for Houston,” Gaines said.

Another factor that will likely keep recession fears muted is the prospect of the U.S. presidential election in November. Over the past 70 years, only two recessions have occurred in an election year (1960 and 1980). While that is not a concrete guarantee, the economy is likely to remain in stasis this year as many are waiting for the outcome of the election before implementing economic policy changes or pulling the trigger on major business deals.

Gaines noted that on a national scale, it will be important to monitor high-yield debt and capital flows in 2020, particularly at the institutional and investor levels. A market slowdown could affect everybody from national lenders all the way down to community and regional banks.

The key to Houston’s future growth lies in innovation, according to Jankowski. Initiatives like the ION Innovation Hub in Midtown and the TMC3 expansion project in the Texas Medical Center are examples of the kinds of projects that are aimed at diversifying Houston’s offerings.

But he is concerned that Houston may have missed out on potential investment opportunities by branching out too slowly.

“I think we waited too long to evolve into the innovation game, we were so happy with what was going on with oil and gas,” Jankowski said.