1. Houston, Like the Nation, is Returning to Growth Tim Hopper Senior Economist Federal Reserve Bank of Dallas June 15, 2004

2. External Forces that Drive Houston US Economy Global Economic Conditions Oil and Natural Gas Markets

3. Recession Ends in November 2001 Coincident Index for US Economy

4. US GDP Growth Gains Traction Annualized Growth Rates

5. Unemployment Rate Houston vs. US, SA

6. Why Has Recovery Been So Slow in the US Economy? Hangover from high-tech -- especially telecommunications. Series of continued shocks and uncertainty that have slowed investment: 9/11, accounting scandals, and the invasion of Iraq. A mild expansion implies mild recovery.

7. Monthly Job Creation/Destruction Employment Growth in US US Recession Ends

8. Productivity growth accelerates in the mid 1990’s

9. Aggregate hours worked has bottomed out

10. Corporate investment is expanding

11. Purchasing managers' indices again point to growth in manufacturing and services

12. Retail sales growth continues… in Millions of dollars

13. Housing Starts and Mortgage Rates 1997 to 2004

14. Housing Market Index Indicates Strength

15. Growth of Conference Board’s Leading Indicator

16. Why is the exchange rate important to Houston? Houston has the second largest port in the US (by volume) and has the 4 th ranked airport system by passenger volume. Over 50% of foreign companies located in Texas are in Houston and nearly 60% of Texas companies with foreign operations are located in Houston. Generally, a 1% depreciation in the real exchange rate leads to a 1 % increase in manufacturing employment in Houston within 18 months.

17. Three Effects on Houston Economy Direct impact on exports. Direct impact on the US economy – indirect impact on Houston. Energy prices. Oil is denominated in dollars.

18. Trade Weighted Value of the Dollar 1995 to Present

19. Short Term Interest Rates in Three Economies

20. Foreign Direct Investment as Percent of GDP

21. Foreign Purchases of US Stocks

22. Exports Increase with Weak Dollar

23. IMF World Economic Outlook Annual Percent Growth Source: IMF, World Economic Outlook, April 2004

24. Energy and Houston 50% to 60% of Houston’s economy is directly or indirectly linked to energy markets. Upstream Exploration. Downstream refining and petrochemical operations.

25. Baker Hughes Rig Count Oil vs. Gas Directed Drilling

26. Why Is Domestic Drilling Slow? Market Premium & Distrust of OPEC Gas Inventory near Long Term Trend Big Company Consolidation Asset Transfers from Majors to Independents Lack of Major US Prospects

27. Ethylene Margins Cash Margins (cents/pound), Ethane

28. New Hydrocarbon Project Announcements Texas and Louisiana Gulf Coast, 1986 to Present No. of Projects

29. Houston Treads water in 2002 & 2003 US economic growth fluctuates between strong growth and weak growth. Global economic growth is following the US. Energy prices increase with Iraq conflict. Turning Point arrived in the summer of 2003.

30. Job Growth over Three Month Increments Houston vs. US

31. Oil Extraction Jobs in Houston 1990 to Present

32. Manufacturing Jobs in Houston 1990 to Present

33. Two Scenarios Scenario One: Slower US recovery, energy prices decline moderately, rig count stable to down –Conclusion: 1.5% job growth Scenario Two: Strong national recovery, energy prices stable to firm, rig count stable to up, dollar stable at current rates or weaker. –Conclusion: 3.0% job growth

34. Houston’s Employment Forecast

35. Conclusion Things are finally moving in the right direction for Houston. This economy tends to lag the national economy. This period is no exception. A pick up in the national economy will help Houston and momentum will grow as the year progresses. The rig count is stable and employment is beginning to firm up with prices. 2004 should see 2.0 - 2.5% employment growth with 2005 possibly even stronger.

36. Houston, Like the Nation, is Returning to Growth Tim Hopper Senior Economist Federal Reserve Bank of Dallas June 15, 2004