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Federal Reserve Bank of Dallas San Antonio Branch South Texas Economic Trends and Issues Issue 2, 2005 Cyclical Differences Emerge in Border City Economies S Vista ince the implementation of NAFTA, the South Texas border cities appear tied more to the Mexican economy, while El Paso has more in common with the U.S. and Texas economies. The Texas–Mexico border is a fast-growing region, a complex blend of U.S. and Mexican cultures, languages and customs. It is a dynamic area that has benefited from a large and growing population in northern Mexico, rapid growth in U.S.–Mexico trade and a tenfold increase in maquiladora industry activity over the past two decades. Total population in the four Texas border metropolitan statistical areas (MSAs)—Brownsville, El Paso, Laredo and McAllen—is about 1.8 million, and population growth since 1980 has been 65 percent, versus 24 percent nationally. A high birthrate and young population suggest that the border will continue its rapid growth. This article describes the business cycles of the four main Texas border cities and, based on their economies’ similarities and differences, relates them to the broader economies of the United States, Mexico and Texas. poverty levels make the government sector substantially larger than normal. However, there are also differences. Retail trade is not as important to El Paso as it is to Laredo. Similarly, the economic impacts of the transportation and gas and oil sectors are uneven along the border. Table 1 shows 2003 contributions, by industry, to total earnings for the four Texas border metropolitan areas and the state of Texas. The manufacturing sector is the No. 1 earnings generator for El Paso, while it is No. 3 in Brownsville, No. 4 in McAllen and only No. 10 in Laredo. Transportation and warehousing is the top earnings generator in Laredo, while health care is at the top for McAllen and Brownsville. Retail trade is No. 2 for the border cities with the exception of El Paso, where it is No 3. Texas Border Cities Analysts often measure regional business cycles by looking at movements in various economic indicators, such as employment or the unemployment rate. But different indicators sometimes lead to different conclusions. In analyzing the national economy, researchers consider movements in broad measures of the macro economy, such as real gross domestic product and employment, although neither of Texas border cities are characterized by some common economic features. There is more transportation and distribution activity than in other U.S. cities, mainly due to servicing international trade. We find a relatively large retail sector serving not only the American but the Mexican side as well. And border enforcement and programs that address high Measuring Regional Business Cycles Table 1 2003 Contributions, by Industry, to Total Earnings Percent Brownsville Health care and social assistance 18.1 Retail trade 8.9 Manufacturing 8.8 Transportation and warehousing 4.2 Accommodation and food services 3.7 Construction 3.6 Wholesale trade 3.5 Finance and insurance 3.2 Real estate and rental and leasing 1.6 Information 1.5 El Paso Manufacturing Health care and social assistance Retail trade Real estate and rental and leasing Transportation and warehousing Construction Wholesale trade Finance and insurance Accommodation and food services Information 11.8 9.5 7.9 7.3 5.9 4.8 4.4 3.4 2.7 2.2 Laredo Transportation and warehousing Retail trade Health care and social assistance Finance and insurance Wholesale trade Construction Mining Accommodation and food services Real estate and rental and leasing Manufacturing 16.2 9.9 9.7 4.8 4.3 4.0 3.8 3.4 2.3 1.2 McAllen Health care and social assistance Retail trade Construction Manufacturing Wholesale trade Finance and insurance Transportation and warehousing Accommodation and food services Forestry, fishing, related activities Real estate and rental and leasing 20.4 10.7 5.5 4.6 3.9 3.5 3.3 3.0 1.7 1.5 Texas 12.8 Manufacturing Professional and technical services 8.6 Health care and social assistance 8.5 6.8 Retail trade Finance and insurance 6.5 Construction 6.4 Wholesale trade 6.0 Transportation and warehousing 4.4 Mining 4.0 3.8 Information these measures is necessarily broad enough to completely reflect the underlying state of the economy. To better understand the economic performance of cities along the Texas–Mexico border, we designed a set of economic indexes that define the current state of each economy over time—that is, its business cycle. The indexes are a weighted combination of seasonally adjusted changes in employment, the unemployment rate, real wages and retail sales.1 As shown in Chart 1, from October 1980 to March 2005 the indexes are generally smooth and show a significant amount of correlation among the entire group. Declines occurred in all four of the border metro areas beginning in late 1981, early 1986 and early 1995. While it is evident that these cities share some common cyclical movement, it is also clear that they experience independent cycles, such as Laredo’s downturn in 1999 and the cities’ varied reactions to U.S. recessions in 1990– 91 and 2001. Laredo, by far the smallest of the MSAs, has the greatest cyclical volatility over the period, while El Paso, the largest Texas border city, shows the least. Regional business cycles are typically affected by their national counterparts. In the case of a metro- politan economy, business cycles are affected by both the national and state economies. For border economies such as Brownsville, El Paso, Laredo and McAllen, international business cycle considerations also come into play. One way to understand the local business cycle is to compare the performance of the border indexes with the broader economies of the United States, Texas and Mexico. A high correlation with the state or nation provides important clues about what drives local economic conditions. The border business cycle indexes show that changes in the border region correlate with changes in the Texas, Mexican and U.S. economies, although to differing degrees. As highlighted in Chart 2, all of the border MSAs share cyclical relationships with the broader economies of Mexico, Texas and the United States. Laredo appears most tied to the Mexican economy, while El Paso seems to have the most in common with Texas and the nation. To investigate the correlation of border business cycles before and after NAFTA, we divided our business cycle data into a preNAFTA period from July 1981 to December 1993 and a post-NAFTA period beginning in January 1994. For the pre-NAFTA period, we Chart 1 Border Business Cycles Similar, Yet Different Index, October 1980 = 100 350 Laredo 300 McAllen 250 Brownsville 200 El Paso 150 100 50 NOTE: Excludes government earnings, which average 27.3 percent for all four border cities and 15.3 percent for the state. SOURCES: Bureau of Economic Analysis; authors’ calculations. 0 Oct. ’80 Oct. ’82 Oct. ’84 Oct. ’86 SOURCE: Authors’ calculations. 2 Oct. ’88 Oct ’90 Oct. ’92 Oct. ’94 Oct. ’96 Oct. ’98 Oct. ’00 Oct. ’02 Oct. ’04 analyzed data from July 1981 through December 1993; for the post-NAFTA period, data from January 1994 through June 2002.2 Before NAFTA, the border cities behaved very much like each other and also were strongly correlated with the business cycle changes of Texas and Mexico. The U.S. business cycle was very different. One likely reason was the dominant role of oil prices during this period. Because Mexico and Texas are net energy producers, they benefited from oil price increases, while the United States, as a net consumer, was hurt. In 1986, when the price of oil dropped sharply, Texas and Mexico entered into recession and the border cities followed. Laredo is the only one of the border cities with a significant amount of oil and natural gas production. During the post-NAFTA period, oil and gas prices stabilized, and U.S.–Mexico trade and maquiladora production surged. Two clusters of economic integration emerged. El Paso’s economy now appears to be linked to the U.S. and Texas business cycles, while the South Texas border cities are aligned with Mexico’s. El Paso has become increasingly dependent on the U.S. economy because of its ties to the large maquiladora industry in Ciudad Juárez, which has the most maquiladora jobs in Mexico. And with the rapid growth of high tech and diminished importance of oil in Texas, the state’s economy has become more like the nation’s. On the other hand, the South Texas border cities have become more synchronized with the economic fortunes of Mexico due to their support of cross-border trade and the large numbers of Mexican shoppers. Chart 2 Border Business Cycle Relationships with Broader Economies Brownsville Index, July 1981 = 100 200 Brownsville Texas 180 160 140 United States 120 Mexico 100 80 60 July ’81 July ’83 July ’85 July ’87 July ’89 July ’91 July ’93 July ’95 July ’97 July ’01 July ’99 El Paso Index, July 1981 = 100 180 Texas 160 El Paso Mexico 140 United States 120 100 80 60 July ’81 July ’83 July ’85 July ’87 July ’89 July ’91 July ’93 July ’95 July ’97 July ’99 July ’01 Laredo Index, July 1981 = 100 270 220 Laredo Texas 170 United States 120 Mexico 70 20 July ’81 July ’83 July ’85 July ’87 July ’89 July ’91 July ’93 July ’95 July ’97 July ’99 July ’01 McAllen Index, July 1981 = 100 250 McAllen 210 Texas 170 United States 130 Mexico 90 Regional Reactions to Recession South Texas Border. During the latest recession, El Paso was the only border city that followed the 50 July ’81 July ’83 July ’85 SOURCE: Authors’ calculations. 3 July ’87 July ’89 July ’91 July ’93 July ’95 July ’97 July ’99 July ’01 United States, Texas and Mexico into decline. The comparative success of the Rio Grande Valley economies is probably due to the atypical strength of the real value of the peso, especially during the Mexican economy’s downturn. This was the first time in recent Mexican economic history that a downturn was not driven by financial crisis and a significant fall in the peso’s value. This moderate recession in Mexico was driven by the U.S. recession and its impact on the maquiladora industry.3 The strong peso had a greater effect on the South Texas border cities than it did on El Paso because retail spending by Mexican nationals represents a larger share of the economies of Brownsville, Laredo and McAllen than it does El Paso’s. In 2001, Mexican shoppers accounted for more than $2 billion in retail sales, representing 1.2 percent of total Texas retail sales.4 McAllen was the biggest net exporter of retail sales to Mexicans, with almost $1 billion. Laredo was second, with $540 million, and Brownsville third, with $256 million. El Paso, the largest city, exported $216 million to Mexican nationals (Chart 3). Other factors have also impacted growth in the Valley and Laredo. Plentiful rainfall and high citrus prices in recent years have aided Valley agriculture, although apparel industry declines and low shrimp prices have hurt Brownsville. Laredo, the largest land port for U.S.–Mexico trade, has been boosted by strong international trade flows across the border. El Paso. El Paso’s relationship to the U.S. and Texas business cycles changed after 1994. The El Paso economy increased its correlation with those of Texas and the nation and followed both into recession in 2001. This may be because of the city’s large share of manufacturing jobs and close ties to the maquiladora industry. Juárez has more than 200,000 maquiladora Chart 3 Retail Spending by Mexican Nationals in Border Cities Millions of dollars 4,000 3,500 3,000 2001 exportable retail sales 2001 actual retail sales 2,500 2,000 1,500 1,000 500 0 Brownsville El Paso Laredo McAllen SOURCES: Authors’ calculations, with data from the Texas Comptroller of Public Accounts. jobs and generates $3.4 billion in value-added each year. One estimate is that a 10 percent increase in maquiladora activity in a Mexican border city leads to a 1 to 2 percent increase in employment in the neighboring U.S. border city.5 The severe setback to U.S. manufacturing that began with the 2001 recession set off a chain of events that quickly led to a downturn in Mexico’s maquiladora industry and ultimately to recession in El Paso. Juárez’ maquiladora employment plunged nearly 25 percent in 2001–02. Strength in U.S. manufacturing since mid-2003, however, has led to a resurgence in maquiladora jobs and improvement in the El Paso economy. El Paso has also been negatively affected by declines in apparel manufacturing and deployments of soldiers overseas. Recent announcements of military realignments and a rebound in the maquiladora industry in Juárez, however, suggest that El Paso’s economy will continue to improve over the next 12 months. Summary The areas along the Texas– Mexico border are often influenced by similar forces, yet can sometimes move in different directions based on their unique economic structures. Like brothers and sisters 4 in a family, they often look alike yet behave quite differently. Each border city has experienced a unique business cycle that depends on its sensitivity to a wide variety of factors, such as movements in the broader economies of the United States or Mexico, trade between the United States and Mexico, the real value of the peso, and U.S. and Mexican industrial activity. So far this decade, the business cycles of the southern border MSAs of Brownsville, Laredo and McAllen have benefited from the strong peso and retail sales to Mexican nationals. At the same time, El Paso’s economy has followed the weakness in U.S. manufacturing and Mexico’s maquiladoras. Since mid-2003, however, the maquiladora industry has rebounded with U.S. industrial production and the El Paso economy has begun to recover. —Jesus Cañas Roberto Coronado José Joaquin Lopez Cañas and Coronado are assistant economists at the El Paso Branch of the Federal Reserve Bank of Dallas. Lopez is an economic analyst at the San Antonio Branch. (Continued on back page) New Business-Cycle Indexes Available for Texas Metros The frequency and severity of cyclical swings in a local economy are important to businesses and consumers because such cycles impact production and inventory decisions, employment and unemployment. Analyzing the overall direction of a local economy, however, can be difficult and confusing. Often the handful of local economic indicators gives mixed signals. For example, if the unemployment rate and job growth both increase, is the local economy picking up or weakening? Often it is not clear. To more clearly define regional business cycles, the Dallas Fed has developed composite indexes that aggregate the movements of key economic indicators for nine Texas metropolitan areas. The Metro Business-Cycle Indexes use statistically optimal weights so that movements in the indexes best represent the underlying co-movements in the indicators and thus the underlying state of the economy. The long-run growth in the indexes is set equal to growth in real personal income. The indexes are constructed using the same statistical techniques as the Texas Leading Index.1 In May 2005, the Dallas Fed introduced business-cycle indexes for nine Texas metropolitan areas: Austin–Round Rock, Brownsville– Harlingen, Dallas– Plano–Irving, Fort Worth – Arlington, El Paso, Houston – Sugar Land – Baytown, Laredo, McAllen–Edinburg–Mission and San Antonio. The indexes are published monthly on the Dallas Fed web site, www.dallasfed.org. Movements in the indexes summarize the movements in locally measured nonagricultural employment, the unemployment rate, inflation-adjusted wages and inflation-adjusted retail sales. Historical data on these series are also included on the web page. The quarterly component series of retail sales and wages have been enhanced to provide a longer and more useful time series. The wage data for the metropolitan statistical areas (MSAs) are provided back through 1978. Currently, data are available online from the Census Bureau and the Texas Workforce Commission from 1988 to the present. We hand-entered wage data from the Covered Employment and Wage Reports from 1978 through 1990. Both series were individually inflation adjusted and seasonally adjusted, after which they were linked together to obtain a full data series from 1978 through the most recently available data. Retail sales for the individual MSAs have been adjusted historically back to 1978 for the changes in the MSA definitions that are currently used to construct the labor data. Therefore, the series published by the Dallas Fed contains a historically complete measure for the MSA definitions published in 2000 and are consistent with the other component series. For example, the retail sales numbers for the San Antonio MSA include data from the additional counties of Atascosa, Bandera, Kendall and Medina. The monthly indexes are published a couple of days after the employment and unemployment rate data for the state and metro areas become available from the Texas Workforce Commission. Usually these data are released on about the 22nd day after the end of the reporting month. The indexes show clear patterns of recessions and expansions. While Texas recessions have impacted local economies, many of the state’s metro areas have busi- Chart 1 Chart 2 Tech Centers Dallas and Austin Hardest Hit but Bouncing Back South Texas Border Economies Growing Strongly Index, January 2000 = 100 Index, January 2000 = 100 140 115 Houston 135 110 105 McAllen 130 San Antonio Texas 125 120 100 Fort Worth Austin 95 90 Laredo 115 110 Brownsville 105 Dallas Texas 100 85 El Paso 95 80 90 2000 2001 2002 2003 2004 2000 2005 5 2001 2002 2003 2004 2005 ness cycles that deviate from those of the state, the nation and other Texas regions. For example, the high-tech cities of Austin and Dallas were hit hard by the downturn that began in early 2001 (Chart 1), but the South Texas border cities continued to grow (Chart 2). San Antonio’s Metro BusinessCycle Index shows that the city’s economy has expanded at a slightly faster pace than the Texas economy over the past four years (see Chart 1). San Antonio has a smaller share of high-tech industries and a larger share of health care—a rapidly growing sector. Historically, the presence of stable industries such as government has allowed San Antonio’s business cycle to swing less than those of other metro areas. A reduced federal government presence, particularly military-related jobs, will likely lead to greater business-cycle fluctuations in the future. —Keith R. Phillips Kristen Hamden Phillips is a senior economist and Hamden an economic analyst at the San Antonio Branch of the Federal Reserve Bank of Dallas. Note The authors thank James Hoard and Kay Champagne for helpful suggestions and comments. 1 The procedure is described in more detail in “A New Monthly Index of the Texas Business Cycle,” by Keith R. Phillips, Dallas Fed Working Paper No. 0401, January 2004. For more detail on the local business cycle using the new indexes, see the following Dallas Fed publications: “Composite Index: A New Measure of El Paso’s Economy,” by Jesus Cañas, Robert W. Gilmer and Keith Phillips, Business Frontier, Issue 1, 2003; “A New Index of Coincident Economic Activity for Houston,” by Jesus Cañas, Robert W. Gilmer and Keith Phillips, Houston Business, April 2003; and “Steady-as-SheGoes? An Analysis of the San Antonio Business Cycle,” by Keith R. Phillips and Kristen Hamden, Vista, Winter 2004. All publications are available on the Dallas Fed web site, www.dallasfed.org. Cyclical Differences (Continued from page 4) Notes 1 2 3 4 5 For more information on the methodology of the indexes of coincident economic indicators, see “Business Cycle Coordination Along the Texas – Mexico Border,” by Keith R. Phillips and Jesus Cañas, Federal Reserve Bank of Dallas Working Paper No. 0502, July 2004, available at www.dallasfed.org. The relationship among the four metropolitan areas over time was defined by use of several techniques, including correlation, cluster analysis and spectral analysis. All led to the common conclusions discussed here. For more information, see “Trade, Manufacturing Put Mexico Back on Track in 2004,” by Jesus Cañas, Roberto Coronado and Robert W. Gilmer, Federal Reserve Bank of Dallas Houston Business, March 2005, available at www.dallasfed.org. For more information, see “Texas Border Benefits from Retail Sales,” by Keith R. Phillips and Roberto Coronado, in The Face of Texas: Jobs, People, Business and Change, Federal Reserve Bank of Dallas, forthcoming. See Gordon H. Hanson, “U.S. – Mexico Integration and Regional Economies: Evidence from Border-City Pairs,” Journal of Urban Economics, vol. 50, September 2001, pp. 259– 87. V For more information, contact Keith Phillips at (210) 978-1409 or e-mail keith.r.phillips@dal.frb.org. For a copy of this publication, write to Rachel Peña, San Antonio Branch, Federal Reserve Bank of Dallas, P.O. Box 1471, San Antonio, TX 78295-1471. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted if the source is credited and a copy is provided to the San Antonio Branch of the Federal Reserve Bank of Dallas Editor: Keith Phillips Copy Editor: Kay Champagne Design: Gene Autry Layout & Production: Samantha Coplen This publication is available on the Internet at www.dallasfed.org. Cross-Border Shopping Activity September 23, 2005 Detroit Branch, Federal Reserve Bank of Chicago This one-day conference in Detroit will address the current landscape of cross-border shopping activity. It will focus on such issues as competitive implications, the impact of gaming as a draw for shoppers, and practical changes for public officials and retailers. Conference cosponsors are as follows: • Detroit Branch, Federal Reserve Bank of Chicago • San Antonio Branch, Federal Reserve Bank of Dallas • International Council of Shopping Centers This is the first of two conferences to be held on cross-border retail and related activities. The second, which will focus on the U.S.–Mexico border, will be held in 2006 in San Antonio. For more information, visit the Dallas Fed web site, www.dallasfed.org, and click on “Events.”
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