Economists say risks of a recession are growing as the highest inflation in 40 years undermines buying power, rising interest rates increase borrowing costs for households and businesses, and uncertainty clouds the outlook for investment.
If it comes to a national recession, Houston and Texas are unlikely to escape the downturn unscathed. But so far, the state and local economies are carrying considerable momentum and poised to keep growing throughout the year, according to the most recent forecasts from the Federal Reserve Bank of Dallas. Interviews with businesses and consumers show that demand for goods and services remains strong, despite the squeeze that higher gasoline and food prices are putting on household budgets, and companies are still looking — if not struggling — to hire.
In some instances, local businesses are still contending with supply chain disruptions that are keeping products off their shelves and labor shortages that are holding back their growth.
At the Houston department store Kuhl-Linscomb, owners Pam Kuhl-Linscomb and her husband, Dan Linscomb, say their sales are holding steady from a year ago. They have plenty of customers ready to buy, but not always the merchandise as their vendors face shortages of materials, labor, or both. A vendor who sells mugs is having trouble hiring enough artisans to keep up with demand. A furniture maker is experiencing delays because foam is still hard to come by; sofas that used to be supplied in one or two months are now facing year-long delays.
“We’ve got the customers, we’ve got the people wanting to buy,” Kuhl-Linscomb said. “But when you can’t get the product, that’s a problem.”
Strong growth
The economy, supported by household savings and stimulus spending, surged as pandemic restrictions were lifted, and still appears to have 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 economists expected.
In April. the most recent data available, job openings in Texas topped 950,000, down from about 1 million in March, but 24 percent higher than the 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 percent of the U.S. economy, also remains strong here. The state collected $3.7 billion in all sales taxes in June, up 17 percent from June 2021, easily outpacing inflation, which was 8.6 percent in May.
Aaron Aina, 8, watches friends play air hockey at Cidercade in EaDo.
Marie D. De Jesús, Houston Chronicle / Staff photographerThe resilience of consumer spending was clear by the 100 or so people playing arcade games Thursday afternoon at Cidercade in the East Downtown neighborhood. The bar-arcade’s CEO, Joel Malone, said he’s not too worried about a potential recession, but fears a slowdown next month, when a federal moratorium on student loan payments is set to end — taking a few hundred dollars per month from the budgets of many of his customers
That, coupled with high fuel prices, could deter younger consumers from making the often-long drives across Houston to reach movie theaters, entertainment centers or venues such as Cidercade, Malone said.
Brandon Brown, who was playing an NBA arcade game at Cidercade, said he’s already tightened his spending because of rising gas prices. “I just don’t go out as much,” he said.
Louise Thompson, 6, wears a princess dress while playing an interactive motorcycling video game at Cidercade in EaDo.
Marie D. De Jesús, Houston Chronicle / Staff photographerAt Phat Eatery in Katy Asian Town, the owner, Alex Au-Yeung, said his sales are up 25 percent from a year ago, even as he was forced to raise prices on some menu items to cover his own rising costs. Inflation has pushed the costs of staple ingredients.
Chicken breast has nearly doubled to roughly $4 a pound. A shortage of Sriracha has doubled the costs of a case to $90. Shipping costs—Phat Eatery specializes in Malaysian food, and imports ingredients directly from Asia—have tripled or quadrupled, Au-Yeung said.
He estimates he has had to raise prices 5-to-8 percent on certain menu items, but that most nights his restaurant is bustling.
“We are pretty lucky,” Au-Yeung said. “So far we have not seen a drop, and I hope I don’t see it.”
Old faithful
Soaring oil and gas prices, while delivering a hit to consumers, have helped support the local economy because of 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 report billions more in the second quarter, which ended last week.
The European oil major Shell, which has its U.S. headquarters in Houston, said Thursday it expected its refining operations alone to add a $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 won’t insulate the regional economy from a national or global recession in the way it once did.
“If the US flips into a moderate recession we’re likely to go with them,” Gilmer said — although he doesn’t think a recession is likely in the near term.
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Maddison Graham, 16, and Aliyah Peters, 2, play together an interactive motorcycling video game at Cidercade in EaDo. Consumers are still out in force, supporting the local economy.
Marie D. De Jesús, Houston Chronicle / Staff photographer
Certainly, there are signs that the economy is downshifting. Consumer spending slowed in May as inflation took a bite out of disposable income, the Commerce Department reported. Retail sales also slipped in May.
Rising interest rates are cooling the red-hot housing market. Pending sales, or the number of homes coming under contract, were down 13 percent nationally for the four-week period ending in June 26 — the largest decline since May 2020, according to the real estate firm Redfin.
In Houston, pending sales have fallen for the past four weeks, according to the Houston Association of Realtors. For the week ending July 4, pending sales slipped 35.5 percent compared to the same week a year earlier.
Consumer squeeze
Consumers are undoubtedly feeling the pinch of higher grocery prices, which have risen 12 percent over the year, and soaring gasoline prices, which have jumped 50 percent over the past year.
The combined, additional costs weighed on the minds of many at Montrose’s Shepherd Square, where some shoppers said Friday that they are trying to save costs by minimizing trips to the grocery store and buying in bulk. Others said they’ve cut back on purchases of, say, home goods and knick-knacks that typically draw customers to the Target that anchors the shopping center.
“We’re just doing a lot more planning now,” said Liz Soyars, a 38-year-old nurse.
Gunner Skaggs, 11, and Natalia Medrano, 14, play at the arcade Cidercade in EaDo.
Marie D. De Jesús, Houston Chronicle / Staff photographerSoyars said she and her boyfriend, a nurse practitioner who also works in the Texas Medical Center, have also cut back on eating out – “which is hard to do in Houston,” she said — and plan to travel less in the coming months to make sure they’re financially secure, should a recession hit.
“We’re definitely sitting on our money a bit more now,” she said.
At the Katy retailer Academy Outdoors and Sports, sales remain solid, but are slowing a bit, said CEO Ken C Hicks. Sales at the sporting goods chain slipped 7 percent in the first quarter to $1.5 billion from $1.6 billion in the same period of 2021. To some extent, Hicks said, that’s because people are buying fewer of the big-ticket items, such as bicycles or treadmills, that sold briskly during the lockdowns.
Aaron Aina, 8, plays air hockey at Cidercade in EaDo.
Marie D. De Jesús, Houston Chronicle / Staff photographerShoppers are still coming into the stores, Hicks said, even if they may become more selective and price conscious as inflation cuts into their spending power.
“If you’ve got kids,” he said, “they’re still going to play baseball. You may not buy them a $239 dollar bat, but you’ll buy them the $79 bat.”
Uncertainty ahead
Whether the economy can avoid a downturn remains to be seen, but historically, Hicks added, the cure for inflation has been recession.
At Kuhl-Linscomb, the owners are already looking ahead to the crucial holiday shopping season. The uncertainty about the economy and the strength of holiday spending is weighing on them, they said, but they intend to keep their shelves stocked based on the simple idea that consumers can’t buy what isn’t there.
“It’s a catch-22,” Kuhl-Linscomb observed. “If you’re afraid and you don’t buy, then it’s going to be bad.”
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