1. Border Economy: Not Immune to U.S. Pain Jesus Canas Federal Reserve Bank of Dallas El Paso Branch NALCAB Border Community & Econ Dev Summit July 17, 2009 El 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.

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. −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

9. −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

10. Per-Capita Income along the Border Percent of U.S. per capita income 19701980199020002006 United States100.0 Texas88.997.789.494.995.8 Brownsville52.856.350.650.050.6 Del Rio67.661.957.356.364.1 Eagle Pass38.341.136.138.642.7 El Paso72.964.263.162.268.0 Laredo54.953.648.350.554.8 McAllen47.452.447.745.547.4 New Mexico78.082.576.674.281.5 Las Cruces73.467.964.759.766.2 Arizona93.994.287.386.087.0 Nogales83.477.861.656.660.8 Douglas87.175.971.066.176.7 Yuma84.380.670.755.359.7 California117.7118.2111.1108.8107.9 El Centro94.293.482.259.562.0 San Diego112.6109.7107.1109.9116.6 Source: Bureau of Economic Analysis, Regional Economic Information System, 1969-2006

11. 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%) 3 rd trading partner  Texas ---- $56 billion (34%)

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

13. 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?

14. Maquiladora Employment Mirroring US IP Sources: INEGI and Federal Reserve Board

15. Maquiladora jobs distribution along the border Sources: INEGI

16. How Are Maquiladoras Doing Now?

18. 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

19. 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

20. U.S. Running Surplus in Cross-Border Shopping Exchange Rate U.S. Cross-Border Shopper Balance

21. Mexican Nationals Impact Texas Border Retail Sales

22. 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.

23. 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.

24. Economic Concentration in Border Cities Texas Border Cities BrownsvilleMcAllenLaredoDel Rio Eagle PassPresidioEl Paso Mining** Retail trade******* Transportation and warehousing****** Health care and social assistance**** Accommodation and food services*** Government*******

25. Economic Concentration in Border Cities New Mexico BorderArizona BorderCalifornia Border Las CrucesDouglasNogalesSLRCCalexicoSan 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 ******

26. Outlook for the U.S. economy Real GDP (%) Unemploment Rate (%) Payrolls (000s/month) PreviousNew PreviousNew PreviousNew Quarterly data: 2009:Q2-1.8-1.58.39.1-311.2-521.5 Q31.00.48.79.6-202.1-282.5 Q41.81.78.99.8-43.0-104.7 2010:Q12.42.29.09.838.719.9 Q2N.A.2.9N.A.9.7N.A.103.2 Annual average data: 2009-2.0-2.88.49.1-328.4-422.6 20102.22.0 8.89.6 6.2-13.9 2011N.A.2.7N.A.8.7N.A. 2012N.A.3.0N.A.7.7N.A. Source: Survey of Professional Forecasters, Second Quarter 2009, Federal Reserve Bank of Philadelphia, released on May 15, 2009.

27. Outlook for the Mexican economy 2009 GDP Forecast (%) 2010 GDP Forecast (%) SCHP (Hacienda)-5.5n.a. Banxico (6/1/09)-5.822.09 Banamex (6/1/09)-6.23.0 Bancomer (4/29/09)-3.8 – -4.81.1 IMF (5/1/09)-3.71.0

28. 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

29. 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

30. Border Economy: Not Immune to U.S. Pain Jesus Canas Federal Reserve Bank of Dallas El Paso Branch NALCAB Border Community & Econ Dev Summit July 17, 2009 El 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.

31. Has this relationship changed?