Recession fears? Houston business leaders aren’t worried — yet

Economists say recession risks rise as highest inflation in 40 years saps purchasing power, rising interest rates increase borrowing costs for households and businesses and uncertainty darkens the investment outlook.

If this is a national recession, Houston and Texas are unlikely to emerge unscathed. But so far, state and local economies have considerable momentum and are poised to continue growing throughout the year, according to the latest forecast from the Federal Reserve Bank of Dallas. Interviews with businesses and consumers show that demand for goods and services remains strong, despite the pressure rising gasoline and food prices are putting on household budgets, and businesses are still looking – even struggle – to hire.

In some cases, local businesses are still grappling with supply chain disruptions that keep products off their shelves and labor shortages that stunt their growth.

At the Kuhl-Linscomb department store in Houston, owners Pam Kuhl-Linscomb and her husband, Dan Linscomb, say their sales have held steady for a year. They have lots of customers ready to buy, but not always the merchandise because their suppliers are facing shortages of materials, labor, or both. A vendor who sells mugs struggles to hire enough artisans to meet demand. A furniture manufacturer experiences delays because foam is still hard to come by; sofas that used to be delivered in one or two months are now facing one-year delays.

“We have the customers, we have the people who want to buy,” Kuhl-Linscomb said. “But when you can’t get the product, that’s a problem.”

High increase

The economy, supported by household savings and stimulus spending, has surged as pandemic-related restrictions were lifted, and still appears to be gaining momentum. Hiring remains strong across the country; U.S. employers added more than 370,000 jobs in June, the Labor Department reported Friday, far more than expected by economists.

The labor market is particularly dynamic in Houston and Texas. Local and statewide employment is growing at an annual rate of 6%, compared to 4.5% nationally. Initial jobless claims in the state fell nearly 40% last week from a year earlier.

In April. According to the most recent data available, job openings in Texas topped 950,000, up from about 1 million in March, but 24% up from 770,000 a year ago. About 620,000 Texans were unemployed in April, according to the Labor Department

Consumer spending, which accounts for about 70% of the US economy, also remains strong here. The state collected $3.7 billion from all sales taxes in June, up 17% from June 2021, easily outpacing inflation, which was 8.6% in May.

The resilience of consumer spending was evident by the hundreds of people playing arcade games Thursday afternoon at Cidercade in the East Downtown neighborhood. Bar-arcade CEO Joel Malone said he’s not too worried about a possible recession, but fears a downturn next month, when a federal student loan repayment moratorium is expected come to an end – taking a few hundred dollars a month out of the budgets of many of its clients

That, coupled with high fuel prices, could deter young consumers from making the often long commutes through Houston to reach movie theaters, entertainment centers or places such as Cidercade, Malone said.

Brandon Brown, who played an NBA arcade game at Cidercade, said he had already cut spending due to rising gas prices. “I don’t go out as much,” he said.

At Phat Eatery in Katy Asian Town, owner Alex Au-Yeung said his sales were up 25% from a year ago, even as he was forced to raise prices for some menu items to cover their own growing costs. Inflation has pushed up the costs of basic ingredients.

Chicken breast nearly doubled to about $4 a pound. A shortage of Sriracha doubled the cost of a case to $90. Shipping costs – Phat Eatery specializes in Malaysian cuisine and imports ingredients directly from Asia – have tripled or quadrupled, Au-Yeung said.

He estimates he has had to raise prices by 5-8% on some menu items, but most nights his restaurant is busy.

“We’re pretty lucky,” Au-Yeung said. “So far we haven’t seen a drop, and hopefully I won’t.”

old faithful

Soaring oil and gas prices, while hitting consumers, have helped support the local economy due to the concentration of energy companies here. Oil companies reported billions of dollars in profits in the first quarter of the year, and analysts expect them to bring in billions more in the second quarter, which ended last week.

European oil major Shell, which has its US headquarters in Houston, said on Thursday it expected its refining operations alone to add $1 billion to profits in the second quarter.

But Bill Gilmer, an economist at the University of Houston and director of the Institute for Regional Forecasting, said the oil and gas industry would not insulate the regional economy from a national or global recession as it once did. .

“If the United States slips into a moderate recession, we’ll probably go with it,” Gilmer said, though he doesn’t think a recession is likely in the near term.

Certainly, there are signs of a slowing economy. Consumer spending slowed in May as inflation slashed disposable income, the Commerce Department reported. Retail sales also fell in May.

Rising interest rates cool the hot housing market. Pending sales, or the number of homes under contract, fell 13% nationwide for the four weeks ending June 26 – the biggest drop since May 2020, according to real estate firm Redfin.

In Houston, pending sales have fallen over the past four weeks, according to the Houston Association of Realtors. For the week ending July 4, pending sales fell 35.5% from the same week a year earlier.

Consumer Compression

Consumers are undoubtedly feeling the effects of rising food prices, which rose 12% during the year, and soaring gasoline prices, which jumped 50% during the last year.

The combined extra costs weighed on the minds of many in Montrose’s Shepherd Square, where some shoppers said on Friday they were trying to cut costs by minimizing trips to the grocery store and buying in bulk. Others said they have reduced their purchases of, for example, homewares and trinkets that typically draw customers to the target that anchors the mall.

“We just do a lot more planning now,” said Liz Soyars, a 38-year-old nurse.

Soyars said she and her boyfriend, a nurse practitioner who also works at Texas Medical Center, have also cut back on their restaurant meals — “which is hard to do in Houston,” she said — and plan to travel less in the coming months to ensure they are financially secure in the event of a recession.

“We’re definitely sitting on our money a bit more now,” she said.

At retailer Katy Academy Outdoors and Sports, sales remain strong, but are slowing down a bit, CEO Ken C Hicks said. Sales for the sporting goods chain fell 7% in the first quarter to $1.5 billion, from $1.6 billion in the same period of 2021. To some extent , Hicks said, it’s because people are buying fewer big-ticket items, such as bikes or treadmills, that sold out quickly during the shutdowns.

Shoppers are still coming to stores, Hicks said, although they may become more selective and price-conscious as inflation reduces their purchasing power.

“If you have kids,” he says, “they’ll still play baseball. You can’t buy a $239 bat from them, but you will buy the $79 bat from them.

Uncertainty to come

Whether the economy can avoid a downturn remains to be seen, but historically, Hicks added, the cure for inflation has been recession.

Owners at Kuhl-Linscomb are already anticipating the crucial holiday shopping season. Uncertainty about the economy and strong holiday spending are weighing on them, they said, but they intend to keep their shelves stocked based on the simple idea that consumers can’t buy what’s is not there.

“It’s a catch-22,” observed Kuhl-Linscomb. “If you’re scared and you don’t buy, then it’s going to be bad.”

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