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Outlook for the El Paso-Juarez Border Region
Roberto CoronadoEconomist
Federal Reserve Bank of Dallas, El Paso Branch
Paso del Norte GroupMarch 22, 2011
The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positionsof the Federal Reserve Bank of Dallas or of the Federal Reserve System. Any secondary distribution of this
material is strictly prohibited. May be quoted with appropriate attribution to the author.
El Paso is Recovering at Full Speed
160
165
170
175
180
185
190
195
200
205
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
U.S. Recession of 2001 and jobless recovery
-4.8% from peak
Source: Federal Reserve Bank of Dallas
+3.8% from bottom
2.0
2.7
1.1
2.0
1.5
-2.3
2.5
-1.1
0.9
2.01.9
3.6
-0.3
-1.2
2.82.6
-3
-2
-1
0
1
2
3
4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Percent Change in El Paso Employment(Dec/Dec)
Notes: 2011 is Jan/Jan.Source: Federal Reserve Bank of Dallas.
235.0
240.0
245.0
250.0
255.0
260.0
265.0
270.0
275.0
280.0
285.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
El Paso Employment2000-Present (000s, SA)
Source: Federal Reserve Bank of Dallas
El Paso’s Recession Milder Than Other Border Cities
Metro Area Peak Trough Decline(%)
Bottom to Today (%)
Texas June 2008 November 2009
-5.6 2.9
El Paso February 2008 September 2009
-4.8 3.8
Brownsville February 2008 August 2009 -5.4 2.1
Laredo August 2007 November 2009
-19.1 3.8
McAllen Feb 2008 March 2010 -15.8 3.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Unemployment RateEl Paso vs. US, SA
El Paso now matches U.S. Unemployment Rate
El Paso
U.S.
The Federal Reserve Bank of Dallas and the Bureau of Labor Statistics
U.S. economy, in particular industrial sector
The Mexican economy and the exchange rate
Maquiladoras
Local Military Spending
What Makes the El Paso Economy Work?
U.S. recovery is gaining traction…
-7
-5
-3
-1
1
3
5
7
9
Gross Domestic ProductQuarterly Percent Growth, Chained 2005 Dollars
Source: Department of Commerce and Bureau of Labor Statistics
Divide GDP into Inventory Change and Final Sales
• GDP = Final Sales + Inventory Change
• Final Sales = C + If + G + X – M
• Final Sales are sales from current production
• Change in inventory is negative, it is a draw of past production for current use
• Change is inventory is positive, it is current production held for future sales
-1.1
-3.8
-1.0
0.3
1.1
0.5
2.8
2.2
2.6
1.1
0.8
0.9
1.6
1.0
-3.7
6.5
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0
Inventory Change
Final Sales
Percent Contribution to GDP By Sector
2009 - Q1 2009 - Q2 2009 - Q3 2009 - Q4
2010 - Q1 2010 - Q2 2010 - Q3 2010 - Q4
-8
-6
-4
-2
0
2
4
6
8
35
40
45
50
55
60
65
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Nonmanufacturing ISM Points to aContinued Pick-up in Near-term GDP Growth
Q/Q % change,annualized
Real GDP Growth
ISM Non-manufacturing
SA Index, 50+ = Econ Expand
Source: Bureau of Economic Analysis and the Institute of Supply Management
-1000
-800
-600
-400
-200
0
200
400
600
'03 '04 '05 '06 '07 '08 '09 '10 '11
February
136K192K
Payroll employment gained momentum in FebruaryThousands (SA)
3-month MAΔ in Payrolls
Source: Bureau of Labor Statistics
-1000
-800
-600
-400
-200
0
200
400
600
'03 '04 '05 '06 '07 '08 '09 '10 '11
February 152K222K
Private employment continue to post gains since early 2010 Thousands (SA)
3-month MA
Δ in Payrolls
Source: Bureau of Labor Statistics
U.S. unemployment rate begins to decline
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
February 2011 = 8.9 %
10.8% on Nov/Dec 1982 highest since 1948
Source: Bureau of Labor Statistics
U.S. manufacturing sector continues to grow
80
85
90
95
100
105
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Index 2007= 100, SA
Source: Board of Governors, Federal Reserve System
20
30
40
50
60
70
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
U.S. manufacturing sector gaining momentum
ISM Manufacturing Index
ISM Manufacturing: New Orders Index
SA, 50+ = Increasing
Source: Institute of Supply Management
98
99
100
101
102
103
104
105
106
107
108
2006 2007 2008 2009 2010 2011
Coincident Index Shows Growth Gaining Speed
Source: The Conference Board
96
98
100
102
104
106
108
110
112
114
116
2006 2007 2008 2009 2010 2011
Leading Index Points to Pick Up in Economic Activity
Source: The Conference Board
Real GDP(Annual %)
Unemployment Rate (%)
Industrial Production
(% Annual Rate)
Blue Chip Philly Fed Blue Chip Philly Fed Blue Chip Philly Fed
2011 3.1 3.2 9.0 9.1 4.5 4.4
2012 3.3 3.1 8.4 8.5 4.1 4.2
2011 Q1 3.4 3.6 9.2 9.3 4.4 4.6
2011 Q2 3.4 3.5 9.1 9.2 4.4 4.2
2011 Q3 3.4 3.1 8.9 9.0 4.5 4.4
2011 Q4 3.4 3.4 8.8 8.8 4.4 4.3
2012 Q1 3.1 3.1 8.6 8.7 4.1 3.7
Mexico is also in recovery mode…
5.24.2
3.6
2.5
4.8
-6.2
5.5
7.2
5.0
3.6
6.0
-0.9
0.1
1.4
4.03.2
5.2
3.3
1.5
-6.1
5.5
-8
-6
-4
-2
0
2
4
6
8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Percent Growth of Mexico's GDP1990 to Present
Percent
Source: Instituto Nacional de Estadística Geografía e Informática
90
95
100
105
110
115
120
2003 2004 2005 2006 2007 2008 2009 2010 2011
Link Between U.S. and Mexico EconomiesIn the Industrial Sector
(Index, 2003=100)
U.S.
Mexico
Source: Board of Governors and Instituto Nacional de Estadística Geografía e Informática
• 18 percent of U.S. exports go to Mexico
• 72 percent of U.S. exports to Mexico are industrial products
• 8 percent of U.S. imports are from Mexico
• 90 percent of these imports are industrial
• Maquiladoras are a major vehicle for this cross-border movement of industrial goods
How are the U.S.–Mexican industrial sectors linked?
Sources: Foreign Trade Division, U.S. Census Bureau, and U.S. International Trade Commission
US-Mexico trade: mostly intra-industryImports Exports
SITC Code
Product Billions $SITC Code
Product Billions $
1 33 PETROLEUM 41.6 1 77 ELECTRICAL MACHINERY 16.6
2 78 ROAD VEHICLES 32.1 2 78 ROAD VEHICLES 13.9
3 76TELECOMMUNICATIONS/SOUND RECORDING
31.2 3 33 PETROLEUM 9.6
4 77 ELECTRICAL MACHINERY 22.3 4 75OFFICE/AUTOMATIC DATA PROCESSING MACHINES
7.3
5 74GENERAL INDUSTRIAL MACHINERY
9.2 5 74 GENERAL INDUSTRIAL MACHINERY 7.2
6 71POWER GENERATING MACHINERY AND EQUIPMENT
7.3 6 76TELECOMMUNICATIONS/SOUND RECORDING
6.6
7 87PROFSSIONAL/SCIENTIFIC INSTRUMENTS
6.4 7 89MISCELLANEOUS MANUFACTURED ARTICLES
6.6
8 75OFFICE/AUTOMATIC DATA PROCESSING MACHINES
6.4 8 57 PLASTICS IN PRIMARY FORMS 5.6
9 5 VEGETABLES AND FRUIT 5.9 9 71POWER GENERATING MACHINERY AND EQUIPMENT
5.3
10 93SPECIAL TRANSACTIONS AND COMMODITIES
5.1 10 51 ORGANIC CHEMICALS 5.2
Subtotal 167.6 Subtotal 83.8
Other 48.3 Other 67.7
Total 215.9 Total 151.5
Mexico’s value-added in auto production at record high
0
5,000
10,000
15,000
20,000
25,000
30,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Mill
ion
s
US-Mexico Balance of Trade(US Imports minus US Exports)
Sources: U.S. Dept. of Commerce and the U.S. International Trade Comission
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Mexico Auto ExportsMarch 2004-Present, SA
3-mo Moving Avg.
Source: Asociación Mexicana de la Industria Automotriz, A.C.
Trade in apparel lost to China,a growing role for autos
0
50
100
150
200
250
Transportation Equipment Apparel
Real $, Index, 1997:Q1 = 100
Mexico gains ground in North America light vehicle production
1985
USA 83%
Canada 14%
2009
USA 66%
Canada 17%
Mexico 17%
Mexico 3%
Source: Thomas H. Klier, Federal Reserve Bank of Chicago, with data from Ward’s Automotive Group.
Mexico becomes largest source country of U.S. motor vehicle parts
0%
5%
10%
15%
20%
25%
30%
35%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Canada
Japan
Rest of World China
Germany
Mexico
Source: Thomas H. Klier, Federal Reserve Bank of Chicago, with data from International Trade Commission.
Percent
Growth began as export-driven
0
50
100
150
200
250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Index, Jan 2000=100
Exports to US
Total Exports
Source: Secretaría de Hacienda y Crédito Público, Banco de México, Instituto Nacional de Estadística Geografía e
Consumption is picking up
60
70
80
90
100
110
120
130
140
94
95
96
97
98
99
100
101
102
103
104
Jan
-07
Mar
-07
May
-07
Jul-
07
Sep
-07
No
v-0
7
Jan
-08
Mar
-08
May
-08
Jul-
08
Sep
-08
No
v-0
8
Jan
-09
Mar
-09
May
-09
Jul-
09
Sep
-09
No
v-0
9
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Retail sales
Household credit
Retail sales, Index 2007=1005mma, s.a.
Household credit Index, s.a., January 2007=100
The domestic market is catching up
70
75
80
85
90
95
100
105
(Index, January 2007 = 100, 3mma, seasonally adjusted)
Consumer Confidence
Consumer Expectations
C&I lending coming back…
-5
0
5
10
15
20
25
30
35
40
45y-o-y growth rates
Employment is growing again…
-10
-8
-6
-4
-2
0
2
4
6
8
10
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
levelyoy%
Thousands of workers y-o-y growth rates
What about the Border region?
80
90
100
110
120
130
140
2003 2004 2005 2006 2007 2008 2009 2010
Coahuila de Zaragoza
Nuevo León
Tamaulipas
Mexico
Chihuahua
Index, 2003:Q1 = 100
NOTES: Indicador trimestral de la actividad económica estatal (ITAEE) and Indicador global de la actividad económica.SOURCE: INEGI
Mexico’s recovery underway
• In 2010, economic growth was fueled by manufacturing exports, higher oil prices, and capital inflows.
• The shape of the recovery going forward depends on the U.S. industrial sector
• The domestic market continues to improve with retail sales and consumer confidence picking up.
• International reserves rose 25% and now stand at $122 billion.
• The peso continues to appreciate; now at $12.05 pesos per dollar.
• In the wake of the presidential elections next year, Mexico set up a contingent credit line with the IMF in the amount of $73 billion.
Outlook for the Mexican economy
2011 GDP Forecast (%)
2012 GDP Forecast (%)
Banxico (3/11) 4.1 4.0
Banamex (3/11) 4.8 3.8
Bancomer (2/11) 4.3 3.8
IMF (10/10) 3.9 n.a.
Blue Chip (3/11) 4.1 3.7
UTEP BRMP (12/10) 3.2 n.a.
Juarez and the Maquiladora Industry
130
140
150
160
170
180
190
200
210
100
120
140
160
180
200
220
240
260
280
1990 1993 1996 1999 2002 2005 2008 2011
El Paso Follows Maquiladora Industry
El Paso CI
Juarez Maquiladora Employment
Thousands, SA Index Jul-1992=100
Source: INEGI and Dallas Fed
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.41
99
1
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
Maq
uila
do
ra V
alu
e A
dd
ed
U.S
. bo
rde
r C
ity
Emp
loym
en
t
El Paso-Ciudad Juarez
Maquiladora Value Added U.S. Border City Employment
Economic integration at PDN
-60
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011
Juarez Maquiladora Employmentm-o-m annual rates
FRB El Paso Estimate U.S. IP IMMEX
60
65
70
75
80
85
90
95
100
105
110
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Maquiladoras are Rebounding Matamoros Nuevo Laredo Reynosa Juarez
Source: Manufacturing, Maquiladora, and Export Service Industry (Mexico)
• 10 percent increase in maquiladora output in Ciudad Juarez leads to an increase in El Paso employment as follows:
− 3.0 percent increase in total employment
− 5.4 percent in transportation employment
− 1.4 percent in retail trade employment
− 2.2 percent in finance, insurance and real estate (FIRE) employment
− 2.0 percent in services employment
− (-) 1.2 percent in manufacturing employment
Maquiladoras impact on El Paso
• Over the years, the bulk of the impact has switch from the manufacturing sector to the services sector.
• El Paso continues to be a supplier to the maquiladoras in Juarez, but we now supply business services.
• This is good news to us because these type of jobs pay higher wages than the traditional manufacturing jobs
Has the maquiladoras’ impact to the El Paso economy changed over time?
Peso Devaluation Hurts Local Retail Sales
-3
-1
1
3
5
7
9
11
13
15
17
19
-10
0
10
20
30
40
50
60
70
1978 1982 1986 1990 1994 1998 2002 2006
REX Pesos/$ Brownsville El Paso Laredo McAllen
Real Exchange Rate, 2007=100, Pesos/$Share of Exportable Retail Sales
Retail Sales to Mexican Nationals By US Border City(Net of Sales by US Shoppers in Adjacent Mexican City)
0
10
20
30
40
50
60
El Paso Brownsville Laredo McAllen
1978-1992
1993-2001
2001-2007
Influence of Retail Sales Has Declined with NAFTA and Perhaps Higher Security
8
9
10
11
12
13
14
15
16
80
90
100
110
120
130
140
150
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Border retail sales response to value of the Peso
Index, 2000:Q1 = 100, Real Peso/Dollar
McAllen
NEX
Brownsville
Laredo
El Paso
The exchange rate also affects border crossings
9
10
11
12
13
14
15
50
60
70
80
90
100
110
120
130
140
2006 2007 2008 2009 2010 2011
Pesos per dollarIndex, January 2006 = 100
VehicleCrossings
Truck Crossings
Nominal Exchange Rate
NOTE: Seasonally adjusted data.SOURCES: Texas A&M International University, Texas Center for Border Economic and Enterprise Development and Banco de Mexico.
US-Mexico trade by top 10 land ports in 2010 (billions of U.S. $)
Rank City Total Trade Share of Total (%)
1 Laredo, TX 121.3 39.0
2 El Paso, TX 55.8 17.9
3 Otay Mesa – San Ysidro, CA 31.0 9.9
4 Hidalgo, TX 22.7 7.3
5 Nogales, AZ 19.8 6.4
6 Eagle Pass, TX 16.8 5.4
7 Santa Teresa, NM 13.3 4.3
8 Brownsville – Cameron, TX 12.3 3.9
9 Calexico, CA 10.3 3.3
10 Del Rio, TX 3.1 1.0
11 Other 5.0 1.6
Total 311.3
Source: Texas Center for Border Economic and Enterprise Development, Texas A&M International University
Why Has Peso Strengthened?
• Economy growing again
• US continues zero interest rate policy, encouraging capital flows to Mexico
• Mexico has pursued good fiscal and monetary policy
• Mexico seen as part of the developing world which leads the world’s economic growth
Fort Bliss Kept El Paso From Serious Recession
Fort Bliss
• Ft. Bliss continues to support the local economy, with $3.2 billion spent 2006-2009, and 40% going to local contractors.
• For the 2010-2012 period, Ft. Bliss expenditures will be decline to $0.5 billion per year.
• However, as the troops arrive the local stimulus shifts from construction spending to population growth.
• Counting soldiers, wives, and children, from 2006 and 2012 the population associated with Ft Bliss increases by nearly 50,000.
0
1000
2000
3000
4000
5000
6000
pre-2009
2009 2010 2011 2012 2013
Cumulative Construction Spending at Ft. Bliss Will Reach $5 Billion
Between 2008 and 2013$Million
0
500
1000
1500
2000
pre-2009
2009 2010 2011 2012 2013
The Biggest Years for Military Construction Spending Are
Now Behind Us$ Million
0
1000
2000
3000
4000
5000
6000
7000
8000
2008 2009 2010 2011 2012 2013
School Year (2008=Fall 07/Spring 08)
Soldiers
Spouses
Children
Net Additions to Fort Bliss Population Sees a Peak in 2011
Source: Team Bliss Base Transformation Office
4,072
7,863
5,006
15,969
7,8338,891
El Paso growing again, leading the U.S.The local recession was milder than
elsewhere.
El Paso outperforming the nation in the recovery
Comparison through January 2011: employment data seasonally adjusted
El Paso US
3-Month 0.61 0.24
6-Month 1.01 0.30
12-Month 2.37 0.81
24-Month 1.66 -2.43
Outlook for the El Paso-Juarez Region
• The U.S. economy is coming out of the worst recession in decades, recovery has gained momentum in recent months.
• El Paso’s dependence on manufacturing continues. The maquiladora’s turnaround is good news for El Paso job growth.
• Maquiladora recovery depends heavily on autos. Can we expect a normal cyclical recovery there?
• Stimulus from Ft. Bliss continues to be strong, but the stimulus into the local economy now changes from construction spending to population growth.
• The impact of the violence across the border might be sending mixed signals.
Outlook for the El Paso-Juarez Border RegionRoberto Coronado
915.521.5235
The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positionsof the Federal Reserve Bank of Dallas or of the Federal Reserve System. Any secondary distribution of this
material is strictly prohibited. May be quoted with appropriate attribution to the author.