2018 was nothing short of a remarkable year of expansion and growth in the Odessa metro area general economy, and that trend is solidly reflected in the Odessa Economic Index throughout the year. And even at that, the index is almost certainly undervalued because of the high likelihood that current Odessa employment estimates are wildly understated. When revised employment estimates for Odessa and other Texas metro areas are released in early March, only then will the full magnitude of economic growth be realized. The picture is incomplete at present, and that will remain the case in advance of the revised employment estimates for 2018.
Even with current information suggesting year-over-year employment growth of barely over 1% in December, the Odessa Economic Index continued to soar through year-end 2018, adding more than two full points in each of the last three months of the year. The index improved to a record 256.9 in December up from 254.6 in November, and up an incredible 16% over the December 2017 OEI of 221.0 (which in turn was up by over 16% compared to the year-end 2016 index).
Year-over-year growth rates in the Odessa Economic Index reached as high as 22.5% in May 2018 before ending the year at 16.2%. Those slowing rates of increase are reflected in the fourth quarter numbers as well, with annualized growth in the OEI at 11.4% in the final quarter of the year. But that phenomenon reflects nothing more than the logical understanding that growth rates of 20%-plus are not likely sustainable over a long period of time.
While it likely had little or no impact on general economic growth at year-end 2018, at least somewhat disturbingly the Texas Permian Basin Petroleum Index declined in the last two months of the year after 25 straight months of growth dating back to the index trough in September 2016. The TPBPI declined to 343.8 in December down from 346.7 in November (and 349.4 in October – which was revised upward due largely to upward revisions in Texas Permian crude oil and natural gas production estimates) but remains up by some 19% compared to the December 2017 regional oil and gas index.
Crude oil prices continued to decline in December following a cyclical October peak of $67.19 on average for the month. The December posted West Texas Intermediate crude oil price of 45.31 was down by nearly $22/barrel, a 33% decline. The decline in the daily posted price was particularly sharp, from a high of $73/bbl in early October to $39.25 on Christmas eve. That’s a decline of over $33/bbl, and a distressing 46%.
The rig count for RRC districts 7C, 8, and 8A lost another five rigs on average in December at 382, down from 387 in November and the cyclical high of 390 in October. The 475 drilling permits issued in that same region was down by over 10% year-over-year, and in fact was the lowest monthly total since November 2016.
And again, without fail, historically even a one-month decline in the Texas Permian Basin Petroleum Index has signaled the onset of a sustained contraction to one degree or another in the regional oil and gas economy. However, that may not be the case this time. Crude oil prices have recovered a significant portion of what was lost in November and December. It may well have been a series of geopolitical events that resulted in the quick and sharp decline, and the market seems to be working through these issues. Posted crude oil prices are hovering around $50/bbl at month-end January. Market sentiments leading up to the October surprise were generally bullish, and it may be the case that crude oil markets are finding their way back to those characteristics.
If so, that would mean continued generally favorable oil and gas economic conditions across the region, which in turn would continue to buoy the Odessa metro area general economy.
The returns in the economy were nothing short of fantastic in 2018. Incredibly, with the exception of employment growth rates every single component of the Odessa Economic Index improved by at least double-digit percentage points for the year 2018 compared to the prior year. The same is true of the fourth quarter, and for the month of December, save for the December monthly average home sale price.
General real (inflation-adjusted) spending by households and businesses – one of two mainstay local economic indicators – per December sales tax receipts was up by a whopping 38% in 2018 compared to 2017, which in turn was up by 27% compared to the 2016 real spending total. Fourth quarter spending posted a 27% year-over-year increase, which included a sharp 35% increase for the month of December.
The other mainstay local economic indicator is employment. Again, however, Odessa employment estimates in 2018 are almost certainly dramatically understated, especially in the latter half of the year. This renders the current published monthly estimates essentially meaningless, and we eagerly await revised employment data for Odessa which is scheduled to be released on March 8. The unemployment rate, though also subject to future revision, is much closer to correct and continues to indicate a very tight labor market through year-end 2018. The December unemployment rate of 2.6%, the lowest December unemployment rate on record, is down from 3.0% in December 2018. The 2018 annual average unemployment rate is down sharply at 2.9% compared to 4.1% on average in 2017.
Real auto spending was up by over 31% for the year, including year-over-year increases of over 30% in December and 21% in the fourth quarter, also coming on top of large gains in 2017.
Construction activity, while nowhere near prior record levels, was significantly improved in 2018 compared to 2017. The real valuation of all building permits issued was up by about 11% for the year, including a 25% increase for December and 29% increase for the fourth quarter compared to year-ago levels.
The housing construction component set a new record in 2018 by far. In fact, more new single-family residence building permits were issued through October than any previous annual total. The 754 permits outpaced the previous annual record of 600 permits in 2013, posting a sharp 43% gain over 2017 in the process. The December monthly total was more than three times higher than the low total of 25 permits issued in December 2017, and the fourth quarter total was nearly double the permit total in the last three months of the 2017.
Existing home sales set all manner of new records in 2018 as well. Over 1,700 sales were closed in 2018, outpacing the previous annual record of 1,515 homes sold in 2006. The average price of those sales skyrocketed upward in 2018, increasing by over 14% for the year and averaging over $200,000 for the first time. The December monthly average was “only” about 6% higher compared to the December 2017 monthly average, which was nearly 18% higher compared to December of the prior year. The aggregate of these numbers, the total dollar volume of residential real estate sales in the Odessa market, adjusted for inflation, increased by a monster 44% in 2018 compared to 2017.
Establishing new records in 2018 were: the Odessa Economic Index itself, general spending, auto spending, hotel/motel activity, employment, the unemployment rate, new housing construction permits, existing home sales, prices, and total sales dollar volume. Only total construction (building permit valuations) failed to set a record in 2018.
The Odessa economy appears to be moving into 2019 with considerable growth momentum, as most of the components of the Odessa Economic Index maintained continued rapid rates of expansion through year-end 2019. Hanging over the economy, however, is the decline in regional oil and gas activity as represented by the Texas Permian Basin Petroleum Index in November and December. However, price recovery in early 2019 is a good sign and points to the possibility that the retreat at year-end 2018 may be just a blip on the economic radar that hopefully will place no downward pressure on the Odessa general economy in the year ahead.