El Paso Economy Sluggish in 2007

FEDERAL RESERVE BANK OF DALLAS • EL PASO BRANCH ISSUE 2 • 2007

CrossECONOMIC TRENDS IN roadsTHE DESERT SOUTHWEST El Paso Economy This has been a disappointing year for El Paso in terms of job growth. Through October, the city Sluggish in 2007: added only 1,200 new wage and salary jobs, ac- cording to seasonally adjusted data, an annualized growth rate of less than 1 percent.1 The seasonally U.S. Slowdown adjusted unemployment rate remained at a histori- cally low level of 5.4 percent in October, but progress Outweighs in lowering the rate further stalled at midyear. El Paso’s job growth over the past decade has had a strong positive correlation with the U.S. busi- Fort Bliss ness cycle (Chart 1).2 El Paso’s industrial roots and continued economic ties to the Mexican maquila- Expansion dora industry keep the city closely linked to the U.S. factory system. A broad slowdown in U.S. growth— jobs grew at a 1.1 percent rate through October— has been under way for over a year and provides the backdrop to sluggish local growth. However, some elements of El Paso’s economic performance are specific to the city. For example, the major factor behind lower U.S. growth is the housing bust, an event whose effects vary widely in markets across the country, and El Paso has its own story to tell. Further, economic neighbor Mexico has broken out of the mold of mechanically following the U.S. business cycle, with surprisingly good growth continuing in that country. And the maquiladora industry has at least held its own across the border in Ciudad Juárez, with job growth flat in recent months. Finally, El Paso has high expectations built up by the Fort Bliss expansion. It is an economic boom that is still waiting to happen; the stimulus is unfolding more slowly than initially forecast.

Housing Turns Down U.S. economic growth slowed in the middle of 2006, with the gross domestic product expanding at annualized rates of 2.4, 1.1, 2.1 and 0.6 percent in consecutive quarters. Growth bounced back in the second and third quarters of this year to around 4 percent but is widely expected to slip back to near 2 to 2.5 percent in coming quarters. Sluggish auto sales and a major downturn in the housing market are the major reasons for the diminished pace of economic growth. On average, over the last five quarters the El Pasoans could afford a median- Chart 1 priced home. This fell to less than Job Growth in El Paso Slows Along with U.S. 30 percent early this year and Percent U.S. El Paso to nearly 20 percent in the third 3 quarter. Part of the price escala- 2 tion was local and out-of-town

1 speculation driven by the Fort Bliss expansion. 0 The second stage of housing –1 problems began in August, when

–2 subprime, low-documentation and other high-interest-rate lending –3 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 was abruptly curtailed as a re-

NOTE: December-to-December growth; 2007 through October at annualized rate. sult of credit problems spreading SOURCE: Bureau of Labor Statistics, with adjustments by the Federal Reserve Bank of Dallas. through financial markets. This high-interest lending had been in- strumental in fueling home-price decline in residential investment the third quarter of this year, only escalation by stretching the nor- alone has subtracted nearly 1 per- 4 percent could do so. New York mal lending standards and greatly cent from GDP growth. and Miami follow a similar pattern, expanding the number of poten- The housing downturn un- while more developer-friendly cit- tial buyers. As these financing ve- folded in two steps. ies like Atlanta, Houston and Dal- hicles disappeared, they sharply The first stage was a rapid las saw limited appreciation rela- narrowed the number of potential price appreciation in many met- tive to income, even in the face of buyers. ropolitan markets, the product of strong economic growth and surg- Table 2 shows the percentage low-interest rates that drove de- ing home demand. As these local of new mortgages by metro area mand, and land-use and building price bubbles burst, the resulting in 2006 that were originated us- restrictions that limited the sup- decline in metropolitan housing high-interest loans, defined as ply of new homes in many mar- ing markets was uneven across mortgage lending at rates 3 per- kets. Price appreciation turned metro areas but big enough in ag- cent or more above the yields on into a price bubble in selected gregate to be a macroeconomic prevailing Treasury securities of markets, mostly on the East and event, with double-digit declines similar duration.4 Selected major West coasts, and the bubbles be- nationally in new and existing metro areas are listed on the left; gan to burst in 2006 as potential home sales, residential starts and regional cities are on the right. buyers were increasingly priced permits. Texas border cities, including El out of the market. El Paso was part of the prob- Paso, relied heavily on high-inter- For example, in late 1999, 43 lem. Local home prices jumped est lending last year and now find percent of families in Los Angeles 43 percent between 2004 and the a significant fraction of those po- could afford to buy and finance a third quarter of this year. In first tential customers excluded from median-priced home (Table 1).3 By quarter 2004, over 70 percent of the market.

Table 1 Table 2 Percentage of Local Families Use of High-Cost Mortgages for Originations by Metro Area, 2006 That Can Afford Median-Priced Home Major cities Percent Regional cities Percent 1999 2007 Detroit 52.94 McAllen 54.25 Fourth Third Miami 50.07 Laredo 49.00 quarter quarter Los Angeles 34.69 Brownsville 47.37 Los Angeles 43 4 Las Vegas 31.06 El Paso 37.18 New York 55 7 Chicago 27.33 Phoenix 30.33 Miami 59 11 Atlanta 24.37 Tucson 20.14 Chicago 61 40 New York 21.65 Las Cruces 17.44 Dallas 64 54 Boston 19.88 Albuquerque 17.10 Houston 66 47 Philadelphia 16.74 Atlanta 73 64 San Francisco 13.32

SOURCE: Wells Fargo Housing Opportunity NOTE: A high-cost mortgage is one that yields 3 percent above prevailing Treasury securities. Index. SOURCE: Home Mortgage Disclosure Act data, Federal Financial Institutions Examination Council.

Crossroads Issue 2 • 2007 Both new- and existing-home sales slowed sharply this year in Chart 2 El Paso, with the top of the mar- Single-Family Building Permit Trend Down in El Paso ket hurt worse than the less ex- Number of permits 500 pensive end. Existing-home sales 12-month average 450 were down 21 percent in October Monthly versus a year earlier; the number 400 of houses on the market jumped 350 70 percent in the same period. 300 250 Builders have pulled back sharply 200 on new construction and, in some 150 cases, are returning lots to de- 100 velopers. As seen in Chart 2, the 50 number of single-family permits 0 issued in El Paso has been fall- ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ing steadily all year, taking away SOURCES: Census Bureau; Haver Analytics. an important source of recent growth for the city. benefit from proximity to the U.S., in Chart 4) is for all manufacturing, Mexico and the Maquiladoras like big-screen television sets and but maquiladoras dominate manu- Another source of El Paso’s appliances; products with a high facturing in Juárez. This series in- slowing economy is the maqui- ratio of value-added to labor con- dicates that employment in Juárez ladora industry. Maquiladora tent, like medical instruments; factories turned flat this year and employment in Ciudad Juárez and products that contain intel- remains in a no-growth pattern. in 2006 grew more rapidly than lectual property to be protected. The importance of maquilado- in any other Texas border city, From 2003 to 2006, maquiladoras ras to El Paso is indicated by the adding over 12,000 jobs. But this again followed the lead of a strong orange line in Chart 4, which shows year, job growth has come to a U.S. economy until a cyclical the Dallas Fed’s index of coinci- standstill as slower U.S. economic slowdown gripped the industry dent economic activity, a measure growth cast a chill over the Mexi- again this year. of the local business cycle.7 El Paso can maquiladora system—includ- Juárez’ maquiladora employ- provides myriad services to maqui- ing Juárez. ment is shown in Chart 4. Mexico’s ladoras in real estate, warehous- Mexico’s maquiladoras are chief statistical agency stopped ing, transportation, logistics, com- intimately tied to U.S. indus- publishing maquiladora employ- puter systems, management and trial production. Chart 3 shows ment as of last October, but a other services. This is true for all how U.S. industrial production similar data series is available Texas border cities and their Mexi- has driven maquiladora employ- from the Mexican Social Security can neighbors; the general rule of ment since 1990, including the Institute.6 This series (also shown thumb is that a 10 percent increase big downturn of 2000–03, when the industry lost nearly a quarter million jobs. The downturn was Chart 3 partly cyclical, coinciding with Maquiladora Employment Mirrors U.S. Industrial Production the 2001 recession in the U.S., but it was also forced by the advent of Number of workers Index, 2002 = 100 low-wage competition from China 1,500,000 120 and other Asian, Caribbean and 1,300,000 110 5 Central American countries. 1,100,000 Maquiladora employment 100 This low-wage competition 900,000 U.S. Industrial Production Index 90 forced heavy job losses in apparel, textiles, toys and other low-wage 700,000 80 industries. It took several years for 500,000 70

the maquiladora industry to work 300,000 60 through these losses and find firm 100,000 50 footing again in products in which ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07

Mexico has a competitive advan- tage. These include products that SOURCES: Federal Reserve Board; Instituto Nacional de Estadística, Geografía e Informática.

Crossroads Issue 2 • 2007 euro exchange rate that is highly Chart 4 favorable to European buyers. El Paso Follows Maquiladora Industry Number of workers Index, October 1980 = 100 Fort Bliss 350,000 200 In 2005, the Base Realignment El Paso Business-Cycle Index 190 and Closure (BRAC) Commission 300,000 180 170 put a number of West Texas and 250,000 Juárez manufacturing employment 160 southern New Mexico military fa- 200,000 150 cilities up for review: Fort Bliss 140 in El Paso, White Sands Missile 150,000 130 Range near Las Cruces, Holloman 120 100,000 Juárez maquiladora employment Air Force Base in Alamogordo and 110 Cannon Air Force Base in Clovis. 50,000 100 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 Perhaps in testament to the military’s need for open land and clear SOURCE: Federal Reserve Bank of Dallas; Instituto Mexicano del Seguro Social; Instituto Nacional de Estadística, Geografía e Informática. skies for maneuvers, all but one of these regional facilities will remain staffed at pre-BRAC levels. in production in a neighboring Mex- can economy in recent years. This The only one that won’t stay ican city will increase employment is because over 90 percent of Mexi- at pre-BRAC levels is Fort Bliss, in the bordering U.S. city by 1 to 2 can exports go to the U.S., and over which emerged as a significant percent. This influence is apparent 80 percent of those exports are in- winner in terms of size and employ- in the pattern of recent changes in dustrial products. ment. The initial plan was to add El Paso’s economic activity. The However, Mexico has enjoyed 11,500 troops and civilian employ- recent loss of maquiladora momen- solid GDP growth near 3 percent ees to the 8,500 already assigned tum means that El Paso has been in 2007, and expectations are that to the base, bringing total employ- unable to count on another key this growth will continue and pick ment to 20,000. This would result source of economic stimulus dur- up slightly in 2008 (Table 3). This from moving the 1st Armored Divi- ing 2007. separation from the recent slow- sion from Germany to El Paso, with Mexico is important to El Paso down in the U.S. economy is based these gains partly offset by the loss well beyond the maquiladoras, al- on the continued growth of the of the Army’s Air Defense Artillery though these manufacturing plants domestic Mexican economy and School to Oklahoma. probably stand at the top of the strong consumption, driven in part Subsequent announcements list. General economic stability is by oil revenues. It is also based have added a combat brigade to important in bringing the Mexican on strong exports to Europe that Fort Bliss, as well as artillery, avia- shopper to El Paso. Throughout filled in any shrinkage in the U.S. tion and other support units for the the decades, about 14 percent of export market (Chart 5). Just as 1st Armored. These units will take El Paso’s retail sales have been to U.S. exports have soared because the initial plan raising Fort Bliss Mexican shoppers, most crossing of a strong dollar against the euro, employment by 11,500 to one that bridges from Juárez. Economic Mexican exports have followed the adds 20,000 troops and civilians. stability provides confidence to same strong path based on a peso/ This would triple the size of Fort the Mexican consumer and is fun- Bliss to 30,000 by 2012. The Army damental to maintaining a strong is planning a $2.6 billion expan- peso. Mexico’s currency has held sion on the base for living facilities, steady between 10 and 11 pesos Table 3 headquarters and administrative per dollar since 2003, with little Forecasts for Mexican space, dining facilities, aircraft han- change in 2007. Economic Growth gars, barracks and various range Mexico’s economic perfor- (Percent, annual) improvements. In addition, the city mance has been—and is expected 2007 2008 and state are planning and financ- to remain—much better than might Banamex 3.4 3.8 ing extensive road upgrades to im- Bancomer 3.2 3.9 be anticipated given a sweeping Banco de México* 3.0 3.4 prove base access. Local school dis- U.S. economic slowdown. The influ- International tricts must provide for the 27,000 ence of U.S. industrial production Monetary Fund 2.9 3.0 family members who will accom- extends beyond the maquiladoras, *Private domestic and international economic pany the relocating troops. analysts surveyed by Banco de México. and it’s fair to say that the U.S. has In 2006, Fort Bliss saw an ad- SOURCES: Banamex, Bancomer, Banco de been the major driver of the Mexi- México, IMF. dition of nearly 4,000 troops. The

Crossroads Issue 2 • 2007 bulk of these troops were the result for the city because the Evalua- of another 2,500 jobs on the base of a newly formed combat brigade tion Brigade Combat Team will should provide enough momentum under the 1st Cavalry. The net ad- be formed at Fort Bliss. This unit for a better 2008 locally. The year dition of military and civilian jobs will be the test ground for future will remain something of a tug-of- in 2007 was fewer than 1,000, and combat technologies using robot- war between slow national growth much of this stimulus was likely ics and information systems, and it and Fort Bliss spending. offset by the deployment of thou- should attract an array of military —Jesus Cañas sands of troops to Iraq. Original contractors and consultants eager Robert W. Gilmer plans to have much of the expan- to be near this activity during the Charles James sion complete by 2010 have been test and evaluation process. The delayed to 2012, and the biggest city hopes to capitalize on this new Cañas is an assistant economist and James is a research assistant at the years for base expansion—perhaps nucleus of technology development El Paso Branch of the Federal Re- accounting for 14,000 of the 20,000 and testing to form a growing clus- serve Bank of Dallas. Gilmer is a vice increase—will not come until 2010 ter of associated knowledge-based president and senior economist at and 2011. businesses. the Federal Reserve Bank of Dallas. The promise of a significant economic expansion and even an Looking Forward Notes economic boom driven by Fort Expectations are high for eco- 1 The payroll job growth cited here does not nomic stimulus from the Fort Bliss include military employment but only ci- Bliss remains firmly in place. If vilian government jobs. See the discussion we assume that the expansion will expansion, but this stimulus arrived later in the article on military employment add roughly 40,000 new jobs over too late to avoid a significant eco- at Fort Bliss. 2 nomic slowdown in 2007. Sluggish Over the previous 10 years, El Paso’s pay- the long term, both directly at Fort roll employment has averaged only 0.9 Bliss and indirectly through eco- growth in the U.S. industrial sector, percent growth annually, compared with nomic multipliers in the communi- a housing downturn that spread to 1.1 percent for the U.S. and 1.9 percent El Paso and a flat year for the ma- for Texas. ty, this single event adds the same 3 The definition of median income used in number of jobs as were added from quiladora industry all conspired to these calculations is taken from the De- all sources in El Paso during 1997– pull El Paso’s job growth down to partment of Housing and Urban Develop- 8 less than 1 percent through Octo- ment. The methodology changed in 2005, 2005. The arrival of new military making comparisons before and after 2005 and civilian jobs in El Paso may be ber. not strictly comparable. For the sweeping slower than originally anticipated, Improvement should be slow changes we are trying to illustrate here, but steady into 2008. The U.S. it is unlikely that the methodology differ- but the wave of infrastructure ex- ence would alter the picture in a meaning- pansion on the base, on the roads economy is not expected to lend ful way. and in the school districts is just a lot of help in 2008. The consen- 4 These figures were compiled directly from sus for the year centers on below- Home Mortgage Disclosure Act data for beginning. It will provide substan- calendar year 2006, which provide high- tial stimulus for El Paso’s construc- potential 2.5 percent GDP growth interest rate lending by metropolitan tion sector over the next several and an industrial sector that will area. These are for origination of conven- perform well below the long-run tional mortgages (excluding government- years. guaranteed loans) on one- to four-family Also, the expansion carries the average. But infrastructure expan- homes. Refinanced and mobile homes are promise of new technology jobs sion at Fort Bliss and the arrival excluded. See www.ffiec.gov. 5 For details on the maquiladora’s recent history, see “Maquiladora Recovery: Les- sons for the Future,” by Jesus Cañas, Chart 5 Roberto Coronado and Robert W. Gilmer, Mexican Exports to Europe Replace Shrinkage in Exports to U.S. Federal Reserve Bank of Dallas Southwest Economy, March/April 2007. Index, March 2000 = 100 6 (three-month moving average) See “Mexican Reform Clouds View of Key 300 Industry,” by Jesus Cañas and Robert W. Exports to U.S. Gilmer, Federal Reserve Bank of Dallas 250 Exports to European Union Southwest Economy, May/June 2007. 7 This measure averaged a 1.3 percent an- 200 nual increase over the last 10 years in El Paso, and it has grown at a 1.9 percent an- 150 nual rate for the first 10 months of 2007. It is a weighted average of changes in local 100 payroll employment, the unemployment rate, real income and real retail sales. 8 50 Based on total employment calculations (including military) from the Bureau of 0 Economic Analysis, Regional Economic 2000 2001 2002 2003 2004 2005 2006 2007 Information System.

SOURCE: Instituto Nacional de Estadística, Geografía e Informática.

Crossroads Issue 2 • 2007 Correction: Low-Wage Regional Economic Occupations in El Paso Indicators

In “Low-Wage Occupations Re- the city’s ranking improved by adjust- on the main a Hallmark of El Paso Economy,” ments for the cost of living. which appeared in the last issue of Table 2 contained errors in the cal- Dallas Fed Crossroads (Issue 1, 2007), two tables culation of income growth for El Paso, contained errors that did not affect the McAllen and Albuquerque. El Paso’s Web Site article’s conclusions. growth in real wages per worker was In Table 1, wages and salaries significantly stronger than indicated in Monitor economic activity per worker were inadvertently shown the earlier calculations, matching the in Texas, major metros and rather than per capita income. The new U.S. However, growth in real wages border cities with the Texas figures do not change El Paso’s low per worker in El Paso continued to lag Business-Cycle Indexes. ranking due to an income level near its peer cities—including Albuquerque two-thirds of the U.S. average, nor is and McAllen. Posted monthly at Table 1 Per Capita Income Among El Paso’s Peer Cities, 2005 www.dallasfed.org Adjusted for cost of living Per capita Per capita income (dollars) Rank income (dollars) Rank Sarasota, Fla. 41,577 1 39,335 1 Raleigh, N.C. 35,624 2 37,979 3 Crossroads Tulsa, Okla. 34,685 3 38,241 2 ECONOMIC TRENDS IN Little Rock, Ark. 32,770 4 34,386 5 THE DESERT SOUTHWEST Greensboro, N.C. 31,464 5 * * Knoxville, Tenn. 30,898 6 35,312 4 Issue 2 • 2007 Albuquerque, N.M. 30,884 7 31,938 7 Crossroads is published by the El Paso Charleston, S.C. 30,844 8 31,831 8 Branch of the Federal Reserve Bank of Columbia, S.C. 30,810 9 32,397 6 Dallas. The views expressed are those Baton Rouge, La. 29,654 10 29,044 10 of the authors and do not necessarily Greenville, S.C. 29,464 11 30,982 9 El Paso, Texas 23,256 12 26,043 11 reflect the positions of the Federal McAllen, Texas 16,359 13 19,686 12 Reserve Bank of Dallas or the Federal Reserve System. *ACCRA data unavailable in 2005. SOURCES: Bureau of Economic Analysis; Council for Community and Economic Research, Subscriptions are available free of ACCRA Cost of Living Index; Bureau of Labor Statistics; authors’ calculations. charge. Please direct requests for subscriptions, back issues and address changes to the Public Affairs Depart- ment, El Paso Branch, Federal Reserve Bank of Dallas, 301 E. Main St., El Table 2 Paso, TX 79901-1326; call 915-521- Increases in Real Wages, Salaries and Benefits per Worker, 1999–2005 5233; fax 915-521-5228; or subscribe U.S. metros Peer cities El Paso McAllen Albuquerque via the Internet at www.dallasfed.org. Real wages per worker 1999 $47,387 $38,702 $34,287 $28,773 $39,839 Articles may be reprinted on the condi- Real wages per worker 2005 $51,877 $42,533 $37,440 $30,761 $43,810 tion that the source is credited and a Percent of U.S. average 2005 100 82.0 72.2 59.3 84.4 copy of the publication containing the reprinted material is provided to the Annual percentage increase Research Department, El Paso Branch, Nominal wages 4.5 4.9 4.6 8.9 5.4 – Inflation 2.2 2.2 2.2 2.2 2.3 Federal Reserve Bank of Dallas. = Real wages 2.3 2.7 2.4 6.8 3.1 Crossroads is available on the Bank’s – Employment .5 .9 .7 4.6 1.2 web site at www.dallasfed.org. = Real wages per worker 1.7 1.9 1.7 2.2 2.0 Editor: Robert W. Gilmer NOTES: Real wages are in 2005 dollars; percentage changes may not add up due to rounding. Associate Editor: Kathy Thacker SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; authors’ calculations. Graphic Designer: Samantha Coplen

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