Border Economy: Not Immune to U.S. Pain

Jesus CanasFederal Reserve Bank of Dallas

El Paso Branch

NALCAB Border Community & Econ Dev Summit July 17, 2009El Paso, Texas

Disclaimer: The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or of the Federal Reserve System.

Outline− The current state of the U.S. and Mexican economies

− General characteristics of the U.S.–Mexico border

− Drivers behind the U.S.–Mexico border region

1. Trade between the U.S. and Mexico

2. Maquiladora industry

3. Exchange rate

− Potential impacts of recent economic downturn

− Outlook for the U.S., Mexico and Border economies

• The U.S. economy has been in recession over 18 months (according to NBER).

• Output declined 5.7 percent in the first quarter of 2009 (advance figure) and declined 6.3 percent in the last quarter of 2008.

• The labor market has been in the negative territory since January 2008. Since then, 6 million jobs lost, with almost 70% in the last seven months.

U.S. economy

• The unemployment rate now stands at 9.4 percent (May), up from 7.2 percent six months ago (December), and from 4.9 percent in early 2008 (January).

• Industrial sector has contracted on a continuous basis since early 2008, declining to 1998 levels.

• The automotive sector production index reached mid-1990s levels.

U.S. economy

• The current global economic downturn took some time to hit Mexico.

• The Mexican economy started to contract in the second half of last year. GDP declined by:

• Both the set of coincident and leading economic indicators continue in the negative territory.

Mexican economy

Y/Y Q/Q annual rates2008:Q1 3.3% 4.7%2008:Q2 2.5% 1.0%2008:Q3 1.5% -2.3%2008:Q4 -1.7% -9.8%2009:Q1 -8.6% -21.5%

• The industrial sector not doing well, specially auto-sector.

• Consumption (retail sales) is down since last summer.

• The peso has lost around 25 percent in value since August 2008.

• Swine flu collapsed economic activity for a couple of weeks (estimated ½ percentage point decline in GDP in 2009:Q2)

Mexican economy

A Snapshot of the Border Region in 2007  Population   Employment  Baja California 2,993,422   691,031  Sonora 2,463,707   442,116  Chihuahua 3,326,882   711,981  Coahuila 2,573,950   546,174  Nuevo Leon 4,337,085   1,130,801  Tamaulipas 3,116,054   591,873    18,811,100 4,113,975          California 36,377,534   21,238,947  Arizona 6,353,421   3,520,106  New Mexico 1,964,402   1,116,089  Texas 23,843,432   14,160,490    68,538,789 40,035,632          TOTAL 87,349,889   44,149,607  

NOTES: Employment for the Mexican States is formal employment provided by IMSS; for the U.S. States is total employment provided by BEA

− Have common features as border cities, features that also make them different from other U.S. cities

− Typically, marked by strong job growth and weak growth in per capita income

− Impacted by changes in national policies such as minimum wage, trade, and environment

− Border adapts quickly to change, ex: security post 9-11

Border Economies

− A large transportation and distribution sector due to international traffic

− A large retail sector inflated by serving goods to two cities

− A large government sector because of border enforcement and public programs that address high poverty levels

Common Features of Border Cities

Per-Capita Income along the Border  Percent of U.S. per capita income  1970 1980 1990 2000 2006United States 100.0 100.0 100.0 100.0 100.0Texas 88.9 97.7 89.4 94.9 95.8 Brownsville 52.8 56.3 50.6 50.0 50.6 Del Rio 67.6 61.9 57.3 56.3 64.1 Eagle Pass 38.3 41.1 36.1 38.6 42.7 El Paso 72.9 64.2 63.1 62.2 68.0 Laredo 54.9 53.6 48.3 50.5 54.8 McAllen 47.4 52.4 47.7 45.5 47.4New Mexico 78.0 82.5 76.6 74.2 81.5 Las Cruces 73.4 67.9 64.7 59.7 66.2Arizona 93.9 94.2 87.3 86.0 87.0 Nogales 83.4 77.8 61.6 56.6 60.8 Douglas 87.1 75.9 71.0 66.1 76.7 Yuma 84.3 80.6 70.7 55.3 59.7California 117.7 118.2 111.1 108.8 107.9 El Centro 94.2 93.4 82.2 59.5 62.0 San Diego 112.6 109.7 107.1 109.9 116.6

Source: Bureau of Economic Analysis, Regional Economic Information System, 1969-2006

U.S.-Mexico Trade − Mexico is the third most important trading partner for the

U.S.

In 2008, Total trade with Canada almost reached $600 billion, with China $410 and with Mexico $370

− For Arizona, California and Texas, Mexico is their top trading partner:

Arizona ---- $5.2 billion (27%) California ---- $18.3 billion (14%) New Mexico ---- $375 million (15%) 3rd trading partner Texas ---- $56 billion (34%)

Link Between U.S. and Mexico Economies In the Industrial Sector (Index, 2003=100)

• 91 percent of Mexican exports go to the US

• 82 percent of Mexican exports to the US are industrial products

• 62 percent of Mexican imports are from the US

• 91 percent of these imports are industrial

• Maquiladoras are a major vehicle for this cross-border movement of industrial goods

How are US–Mexican Industrial Sectors Linked?

Maquiladora Employment Mirroring US IP

Sources: INEGI and Federal Reserve Board

Maquiladora jobs distribution along the border

Sources: INEGI

How Are Maquiladoras Doing Now?

Maquiladora Growth Feeds Back Into U.S. Border Cities in Many Ways

- In general, a 10% increase in maquiladora activity in Mexican border cities leads to a 1.1% to 2.0% employment increase in U.S. border cities side:

• 2.1% to 2.7% in wholesale trade• 1.7% to 2.7% in transportation • 1.2% to 2.1% in manufacturing • 1.0% to 1.8% in retail trade

“U.S.–Mexico Integration and Regional Economies: Evidence from Border-City Pairs“Gordon H. Hanson

Journal of Urban Economics, 2001

U.S.-Mexico Border Crossings

− Besides heavy trade flows, the U.S.-Mexico border is the busiest border in the world.

− In 2007, almost 220 million people crossed from Mexico to the U.S. while only 62 million people came from Canada (non-commercial crossings)

− This means that almost one-million people cross the U.S.-Mexico border on a daily basis (northbound)

− Along the U.S.-Mexico border, Texas receives the most visitors 107 million, California 76 million, Arizona 32 million, and New Mexico 3 million

U.S. Running Surplus in Cross-Border Shopping

Exchange Rate

U.S. Cross-Border Shopper Balance

24.4

13.7

53.3

31.7

25.7

11.3

51.1

35.6

0

10

20

30

40

50

60

Brownsville El Paso Laredo McAllen

Basic Model

Econometric Model

Share of Total Retail Sales,Average 1978-2001

Source: Federal Reserve Bank of Dallas

Mexican Nationals Impact Texas Border Retail Sales

Cross-Border Retail in Arizona- Direct spending by Mexican visitors to Arizona

totaled $963 million in 2001. With ripple effects, the economic impact rose to nearly $1.6 billion.

- The visitors came mostly from the adjacent Mexican state of Sonora, and 86 percent of the Mexican spending took place in the Arizona border counties of Pima, Santa Cruz, Yuma and Cochise.

- 72% shopping, 14% work, 8% family visits. The Economic Impacts of Mexican Visitors to Arizona: 2001

by Alberta H. Charney and Vera K. Pavlakovich-Kochi, University of Arizona, Research Study, July 2002.

Cross-Border Retail in California

- Mexican nationals’ total impact at about $4.5 billion, supporting 67,000 jobs.

- Jobs tied to cross-border retail trade account for a large portion of employment in some areas—39% in California’s Imperial County and 3% in San Diego

The Economic Impact of Mexican Visitors Along the U.S.-Mexico Border: A Research Synthesis by Suad Ghaddar, and Cynthia J. Brown

Center for Border Economic Studies, University of Texas–Pan American,December 2005

.

Economic Concentration in Border CitiesTexas Border Cities

Brownsville McAllen Laredo Del Rio Eagle Pass Presidio El Paso

Mining * *

Retail trade * * * * * * *

Transportation and warehousing * * * * * *

Health care and social assistance * * * *

Accommodation and food services * * *

Government * * * * * * *

Economic Concentration in Border CitiesNew Mexico

Border Arizona Border California Border

Las Cruces Douglas Nogales SLRC Calexico San Diego

Forestry, fishing, related activities * *      

Construction *   *   *

Wholesale trade     *      

Retail trade   * * * *  

Information         *

Real estate and rental and leasing   *     *

Health care and social assistance *        

Accommodation and food services * * *     *

Government * * * * * *

Outlook for the U.S. economy 

Real GDP (%)  

Unemploment Rate (%)  

Payrolls (000s/month)

  Previous New   Previous New   Previous NewQuarterly data:2009:Q2 -1.8 -1.5 8.3 9.1 -311.2 -521.5Q3 1.0 0.4 8.7 9.6 -202.1 -282.5Q4 1.8 1.7 8.9 9.8 -43.0 -104.72010:Q1 2.4 2.2 9.0 9.8 38.7 19.9Q2 N.A. 2.9 N.A. 9.7 N.A. 103.2Annual average data:2009 -2.0 -2.8 8.4 9.1 -328.4 -422.62010 2.2 2.0   8.8 9.6   6.2 -13.92011 N.A. 2.7 N.A. 8.7 N.A. N.A.2012 N.A. 3.0 N.A. 7.7 N.A. N.A.Source: Survey of Professional Forecasters, Second Quarter 2009, Federal Reserve Bank of Philadelphia, released on May 15, 2009.

Outlook for the Mexican economy

2009 GDP Forecast (%)

2010 GDP Forecast (%)

SCHP (Hacienda) -5.5 n.a.

Banxico (6/1/09) -5.82 2.09

Banamex (6/1/09) -6.2 3.0

Bancomer (4/29/09) -3.8 – -4.8 1.1

IMF (5/1/09) -3.7 1.0

• Peso remains weak (33 percent depreciation) – hard to predict changes. Cross-border retail sector negatively impacted.

• Mexico and Texas expected to weaken further and U.S. remain in decline through first half of 2009.

• Border’s Economy Chilled by U.S. and Mexico Recession

Outlook for The Border

• Maquiladoras are weak due to U.S. and world economies – autos having a particularly significant impact.

• Reduced trade impacting border trade and transportation jobs.

• Health care and government sectors might help cushion the recent downturn

• Long-term outlook is still good.

Outlook for The Border

Border Economy: Not Immune to U.S. Pain

Jesus CanasFederal Reserve Bank of Dallas

El Paso Branch

NALCAB Border Community & Econ Dev Summit July 17, 2009El Paso, Texas

Disclaimer: The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or of the Federal Reserve System.

Has this relationship changed?

90.2

7.7

0.9 1.2

79.2

16.5

2.1 2.2

70.8

22.5

4.2 2.6

69.1

19.7

8.3

3.0

59.0

24.6

11.1

5.3

55.8

26.5

10.67.2

0

10

20

30

40

50

60

70

80

90

100

U.S. Asia without China China Other

200020012002200320042005 Q1

Mexican Maquiladora Imports by Country of OriginPercent

Source: Federal Reserve Bank of Dallas, El Paso Branch with data from Banco de Mexico