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 in- dustry 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 hous- ing 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 3 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.