FRB Dallas Southwest Economy 3Q 2011

8/4/2019 FRB Dallas Southwest Economy 3Q 2011

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F E D E R A L R E S E R V E B A N K O F D A L L A S

SouthwestEconomy

In Th i s I s sue

Mexico Rides GlobalRecovery but Still FacesHurdles

Underemployment PosesLong-Term Financial Riskto More Workers

On the Record: Shiftingfrom World PopulationExplosion to Global Aging

Spotlight: New Instruments,Rules Boost CapitalInvestment in Mexico

Third quarTer 2011

In Th i s I s sueBreaking Out of Recession:Gauging Texas Response

to Fed Stimulus


2/20

PresidentsPerspective

America will overcome

its current challenges i

we are able to replace

government policiesthat were created or the

20th century and are

out o sync in todays

hypercompetitive

environment.

The orces o globalization are recongur-ing the economic landscape. Understanding

their impact on the U.S. economy and mon-etary policy is a major research objective atthe Dallas Fed and the main reason we cre-ated the Globalization and Monetary PolicyInstitute in 2007.

Globalization is shiting growth mo-mentum toward emerging-market nations,heightening competition and acceleratingthe orces o Schumpeterian creative de-struction.

These developments are mirrored in thedemographic trends acing the world today, Joseph Chamie, director o research at the

Center or Migration Studies in New York,notes in his On the Record interview inthis issue oSouthwest Economy. Populationgrowth is largely concentrated in developingnations, Chamie observes. Indias populationgrows about as much in 10 days as the Euro-

pean Unions does in a year, according to the CIA World Factbook.As economic growth increasingly concentrates in populous nations, pov-

erty recedes and wages rise. Many developing nations have abandoned policiesthat burdened their economies and handicapped their progress in avor o thosethat uel growth and economic opportunity or their burgeoning populations.They have promoted education and recruited the most talented to manage theircompanies, teach in their universities and create businesses. These nations rec-

ognize that capital and the types o services, industry and entrepreneurship thatgenerate national wealth are more mobile than ever and will orsake countriesthat shackle business and labor with unnecessary burdens.

America will overcome its current challenges i we are able to replacegovernment policies that were created or the 20th century and are out o syncin todays hypercompetitive environment. Our political leaders must developan entirely new system o taxes, spending and regulation aecting private en-terprise and investors and must crat trade, education, immigration and otherpolicies that enhance our global competitiveness.

To outperorm others and preserve our stature as the most attractive coun-try in which to invest and to create new jobs, we need to do more than justbring ederal spending, taxes and decits under control; we must adopt newmethods o incentivizing U.S. businesses to maintain our supremacy in e-ciency and innovation.

Richard W. FisherPresident and CEO

Federal Reserve Bank of Dallas


3/20 F ED ERA L RE SE RV E BA NK O F DA LL AS T HI RD QUA RT ER 2 01 1 SouthwestEconomy3

Breaking Out of Recession:Gauging Texas Response

to Fed StimulusBy David Luttrell and Harvey Rosenblum

The Federal ReservesEleventh District has been

more responsive to monetary

stimulus than other regions.

From the time the U.S. recession beganin December 2007 through the subsequentrecovery, Texas and the Eleventh Federal Re-serve District have outperormed the nation.1While economic activity is better in Texas, itremains ar rom robust. And though Texasemployment hasnt ully reclaimed levels

reached beore the crisis (Chart 1), the other11 Federal Reserve districts remain 3 to 8 per-cent below predownturn employment peaksas a postrecessionary disquiet lingers.

This sluggish national perormancehas occurred despite the enormous s-cal and monetary repower unleashed tocombat the nancial crisis and accompany-ing recession.2 Why has Texas achieved acomparatively greater recovery than thenation (Table 1)? State economies responddierently to economic shocks and policy

Chart 1Employment Peaked Later and Rebounded Quicker in Dallas Fed District

Index, each districts payroll employment peak = 100

90

91

92

93

94

95

96

97

98

99

100

U.S.

San Francisco

Dallas

Kansas City

Minneapolis

St Louis

Chicago

Atlanta

Richmond

Cleveland

Philadelphia

New York

Boston

t + 54t + 48t + 42t + 36t + 30t + 24t + 18t + 12t + 6 mo.Peak = t

NOTE: The timing o employment peaks varied across Federal Reserve districts. For example, Atlanta district employment peaked in April2007; Dallas peaked in August 2008.

SOURCES: Bureau o Labor Statistics; Federal Reserve Bank o Dallas; authors calculations.

actions refecting regional variations in in-dustry composition and the health o in-stitutions. Texas, entering recession abouteight months ater the nation, emergedrom the downturn in third quarter 2009and outpaced the rest o the country inemployment growth with the aid o its

healthier banking sector, subdued housingboom (and subsequent bust) and globaltrade competiveness.

Economists Kenneth Rogo and Car-men Reinhart suggest that recoveries romrecessions associated with nancial crisestend to be sluggish, drawn-out episodes.This generalization applies to dozens ocountries.3 Through midyear, the recentU.S. recovery appears to be no exception,despite monetary and scal authoritiesrelatively large and timely policy responsesbased on the real-time data at their dis-

posal.4

The recent U.S. experience under-scores Rogo and Reinharts Second GreatContraction label or the U.S. slow-growthpredicament rather than the oten usedGreat Recession tag.

Sizeable StimulusThe rst large legislative policy response

was the $700 billion Troubled Asset RelieProgram (TARP), enacted in October 2008and mostly used to recapitalize the bankingand nancial system. A second major scalpolicy eort, the $787 billion American Re-

covery and Reinvestment Act, took eect inFebruary 2009, 14 months ater the recessionbegan. It provided tax cuts, extended unem-ployment benets, increased ederal undsor education and health care, and promisedshovel-ready inrastructure projects. Thetime lag associated with implementing scalstimulus prompted Stanord proessor RobertHall, the outgoing American Economic As-sociation president, to say: The governmentis incapable o executing a rapid and largeincrease in purchases.5


4/20SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS THIR D QUARTER 20114

Federal Reserve monetary policy, theocus here, provided channels o economicsupport. Two inherent aspects o Fed pol-icymakinga relatively small number odecisionmakers and the ability to meet re-quentlyenable a timely response. But suchaction does not guarantee an immediate orsizeable impact. The Fed undertook policiesaimed at stimulating aggregate demand andreducing the eects o deleveraging and theprospects o defation. These moves included:A series o reductions in the Feds tradi-

tional policy instrument, the ederal undsrate, to near-zero, where it has remained

since December 2008;Encouraging banks to borrow in large

amounts and or extended maturities di-rectly rom the Fed through the discountwindow;

Creation o a wide range o special andtemporary credit acilities or lending tobanks, nonbank primary dealers (whichhandle sales o Treasury securities), creditintermediaries and other central banks;6

Reduction o long-term interest ratesthrough Fed purchases o more than $1.8trillion o mortgage-backed bonds and

Treasuries.

Monetary Policy and Healthy BanksFed policy moves stimulated economic

growth through our primary avenues: a) thebank loan channel; b) the securities marketchannel; c) the asset prices and wealth chan-nel; and d) the exchange-rate channel (Chart2). Regional economic actors account or sig-nicant dierences in the unctioning o banklending, wealth eects and trade competitive-ness. Only the securities market channel is

generally dominated by national economicand nancial market developments.

These our channels infuenced thereal economy during much o the quartercentury preceding 2007 because banksgenerally held enough capital to sae-guard against bad loans and other risks.The transmission mechanism connectingmonetary policy and the macroeconomydepended on a well-oiled banking andnancial sector that during the recent -nancial crisis became conspicuous by itsabsence.

The bank capital linkage, which com-

pletes the nancial market architecture oeective monetary policy, is a unction oboth regulatory policy and the economic

shocks aecting the health and vitality othe banking sector.7 The well-being o thebanking systemnot entirely within thepower o the Fedvaried across the coun-try and helped account or dierences inmonetary policy impact between regions.

Throughout the recession and subse-quent recovery, Eleventh District banks ex-perienced a smaller percentage o problem

loans than banks in the nation as a whole(Chart 3). Noncurrent loans (generally 90days past due) and loan write-os erodebank capital, oten prompting an institutionto reduce its loan portolio. This can cre-ate broader economic issues as decreasedlending diminishes local economic growth,ultimately aecting the ability o other busi-nesses and households to repay their loansand orcing urther loan write-downs andcapital reductions, accompanied by still moreslowing. Texas banks entered the recessionwith a reasonably strong capital position and,subsequently, maintained much o it.8

Texas Banks and Lessons LearnedPlunging oil prices and a real estate crisis

let Texas in near-depression condition and atthe center o the savings-and-loan collapse othe late 1980s. From 1987 through 1991, Texasexperienced 729 bank ailures, representing38 percent o national bank closures. By comparison, Federal Deposit Insurance Corp. datareveal that rom 2007 through August 2011,only eight Texas banks ailed, comprising just

2 percent o the periods U.S. closures. Thestates less-pronounced housing market boomand bust is a key reason or this perormance

Table 1Recovery Appears Stronger in Texas Relative to Nation

U.S. Texas As of (2011)

Percent change from respective business cycle peak (%)*

Employment 5.0 0.3 August

Real personal income 1.1 3.8 First quarter

Real per capita personal income 1.8 0.7 First quarter

Labor orce participants 0.2 4.9 AugustPopulation 3.5 5.6 Second quarter

Most recent measure (%)

Unemployment rate 9.1 8.5 August

Labor orce participation rate 64.0 65.3 August

Home price change rom peak 25.2 2.6 June

* Peak-to-current percent change: the U.S. business cycle peak is dated December 2007 or ourth quarter 2007, and the Texas cycle peak isAugust 2008 or third quarter 2008.

SOURCES: Bureau o Economic Analysis; Haver Analytics; Bureau o Labor Statistics; authors calculations.

Chart 2Architecture o Eective Monetary Policy

Bank capitallinkage

Bank loanchannel

Interest rates Credit standards

Securitiesmarket channel

Interest rates Debt issuance

Asset prices andwealth channel

Collateral values Net worth

Exchangerate channel

Well-capitalized

banks

Fed funds rate

Market interest rates

Monetary policy

Bankregulatory policy


5/20 F ED ER AL R ES ER VE B AN K OF D AL LA S TH IR D QU AR TE R 20 11 SouthwestEconomy5

Chart 3Noncurrent Loan Burden Lighter or Eleventh District than U.S. Banks

Noncurrent loans as a percent o total loans

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7

Other

Other consumer

Credit card

Commercial and industrial

Commercial real estate

Residential real estate

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112

/319/30

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/319/30

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/319/30

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2008 2009 2010 2011 2008 2009 2010 2011

Eleventh District banks

U.S. banks

NOTE: Noncurrent loans are dened as loans past due 90 days or more, plus loans on nonaccrual status.

SOURCE: Second quarter 2011 Report o Condition and Income, Federal Financial Institutions Examination Council.

Chart 4Eleventh District Banks Show Less Distress than U.S. Counterparts

Percent o banks with Texas ratio > 100 percent

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2

4

6

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10

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14

16

18

20

11100908070605040302010099989796959493929190898887868584

Eleventh District

U.S. 5.2

1.1

NOTE: The Texas ratio is dened as noncurrent loans plus other real estate owned as a percentage o tangible equity capital plus loan lossreserves.


One requently used gauge o over-all banking-sector distress is the so-calledTexas ratio, which attempts to assess banksability to withstand losses. A Texas ratioabove 100 percent suggests the potentialor troubled assetsprincipally noncurrentloans and real estate ownedto wipe outan institutions capital base. In the 1980scrisis, 20 percent o Eleventh District banks

had a Texas ratio exceeding 100 percentthus, the origin o the ratios name. Suggest-ing that Texas banks learned some dicultlessons during the 1980s, slightly morethan 1 percent o district banks were at thisdanger threshold in second quarter 2011,compared with a bit more than 5 percent oU.S. banks (Chart 4).

Further, recapitalization and economicreconciliation during the 1980s helpeddistrict banks are comparatively well inthe current period along with much o theNortheast, whose regional banking crisis

occurred in the early 1990s (Chart 5).Economic expansion remains sluggish

in many Fed districts (as noted in Chart 1).Some o the worst perormers in terms oemployment growth, such as the Atlantaand San Francisco districts, conront still-troubled commercial and residential realestate markets. Signicant losses and capi-tal write-downs on residential construc-tion and commercial land developmentloans pressure banking capital, limiting theability to lend. In some states in these re-

gions, housing prices ell 30 to 50 percent,engendering negative household wealtheects. The Atlanta and San Franciscodistricts consequently attracted ewer newresidents and saw some o the countryshighest unemployment. Refecting housingwealth declines, overextended consumermortgage debt and high-risk home equitylending, many homeowners in these re-

gions owe more on their mortgages thantheir houses are worth. Negative-equity is-sues remain severe in Nevada (63 percento mortgaged properties), Arizona (50 per-cent), Florida (46 percent) and Caliornia(31 percent).9

Following the 1980s collapse, Texasregulators bolstered rules governing loan-to-value ratios on residential real estate

loans and limited or delayed implemen-tation o home-equity lending, reversemortgages and home-equity lines o creditGiven this oversight and other actors suchas ample land availability and ewer de-velopment and zoning restrictions, Texashousing stock increased during the nation-al boom without the rapidly rising homeprices and lax lending standards oundelsewhere.10 Burdened by less housingallout, and consequently less householdleverage, the Texas economy remainedrelatively healthy, with greater job-creatingcapability.11 The state also avoided a majorwealth shock and loss o collateral valueunderpinning loans, allowing the asset-price and wealth channel o monetarypolicy to remain relatively unblocked. Ad-ditionally, Texas sustained relatively ewercredit card and other consumer loan delin-quencies.

Trade Boosts GrowthThe impact o lower interest rates on

the value o the dollar is an indirect but



important monetary policy transmissionchannel. A weaker dollar spurs exports,and Texas is the countrys largest exporter,comprising almost one-sixth o the na-tions total by origin o movement. Thestates top exporting industries in 2010were chemicals, computers and electron-ics, petroleum and coal, and machineryand transportation equipment.12 Ater theNorth American Free Trade Agreementtook eect in January 1994, real (infation-adjusted) Texas exports to Mexico andCanada grew 12 percent annually through2000. Further, Texas exports to China haveexpanded 25 percent annually ollowingadmission o China into the World TradeOrganization in December 2001.

Mexico remained the states largesttrading partner last year, accounting or35 percent o Texas exports, ollowed byCanada, 9 percent, and China, 5 percent.Texas is the nations leading producer o

crude oil, natural gas and lignite coal. Pe-troleum and coal exports have increasedmore than ourold since 2005, making up17 percent o total state exports in 2010.While the Texas economy is less depen-dent on oil and gas than in the 1970s andearly 1980s, energy price increases remaingenerally benecial, an advantage overmost other states whose economies tend toslow when energy prices rise.13

Dierences in products states selland where those exports go produce e-

ective exchange-rate shits refecting astates trade-weighted value o the dol-lar.14 In the case o Texas, the real valueo the Mexican peso relative to the dollarespecially infuences export attractiveness.Dierences in relative oreign currencyprices or Texas products and the nation atlarge are depicted in Chart 6. Underlyingthe weakening real trade-weighted valueso the dollar in Texas and the U.S. are theappreciating currencies o the largest U.S.trading partner, Canada, and the largestoreign buyer o Texas products, Mexico.Texas trade-competitiveness has increased,contributing to higher demand or its ex-ports, boosting manuacturing output andbuttressing the state economy through theexchange-rate channel o monetary policy.

Other Contributing FactorsEven in the absence o extraordinary

monetary and scal policy intervention,

the Texas economy likely would have out-perormed the nation during the recovery.Since 1990, the states average annual jobgrowth has exceeded the nations by abouta percentage point. Year to date throughAugust, that advantage has increased toabout 1.3 percentage points, providing apotent lure to prospective workers.

Data rom the 2010 census showTexas population expanded 48 percentsince 1990, twice the national rate. Netbirths (births minus deaths) accounted or

Chart 5Eleventh District Relatively Less Encumbered by Potential Bank Asset Problems(Second quarter 2011)

Percent o banks with Texas ratio > 100 percent by Federal Reserve district

1.1

0

2

4

6

8

10

12

14

16

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20

SanFrancis

co

Dallas

Kansas

City

Minnea

polis

St.Lou

isChi

cago

Atlanta

Richm

ond

Clevelan

d

Philade

lphia

NewYo

rkBos

ton

1.2

2.9

2.0

0.4

7.4

15.4

4.5

2.3

4.2

2.8

8.8


The key drivers o Texas

avorable response to

monetary policy stimulus

were its relatively healthy

and well-capitalized banks,

the absence o a boom-and-

bust cycle in housing and

internationally competitive

export industries.



60 percent o the growth; migration romother countries and states accounted or40 percent.15 Domestic infows rose signi-cantly in 200709, perhaps refecting therelatively strong state economy beore therecession and the shorter business-cyclecontraction. In the long term, a relativelylow cost o living, including no state in-come tax, and the availability o jobs at-tract workers.

In-migration rom abroad oten hingeson conditions in countries o origin. Recentviolence in Mexico has produced an infuxo middle- to high-income immigrants,bringing their human and nancial capitalacross the border to El Paso, Houston, SanAntonio and Austin.16

Texas has beneted rom structuraladvantages such as natural resources, Gulports and geographic proximity to its larg-est trade partner. Additionally, regionaleconomic drivers have contributed to theunctioning o the bank loan, asset price/

wealth and exchange-rate channels omonetary policy. Factors such as the rela-tive health o the Texas banking sectorand housing market and strong exportindustries helped promote national policyeectiveness and allowed the state to out-perorm the nation.

Luttrell is a senior economic analyst and coordi-

nator o economic and fnancial analysis, and

Rosenblum is executive vice president and director

o research at the Federal Reserve Bank o Dallas.

Chart 6Texas Weaker Eective Exchange Rate Boosts State ExportsIndex, June 2009 = 100

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JulyJuneMayApr.Mar.Feb.Jan.Dec.Nov.Oct.Sept.Aug.JulyJuneMayApr.Mar.Feb.Jan.Dec.Nov.Oct.Sept.Aug.JulyJune

2009 2010 2011

U.S. real trade-weightedvalue of the dollar

Texas exports

U.S. exports

Texas real trade-weightedvalue of the dollar

SOURCES: Census Bureau; Bureau o Labor Statistics; Federal Reserve Board; Dallas Federal Reserve Bank; authors calculations.

NotesThanks to Pia Orrenius, John Duca, Jackson Thies and Tom

Siems or their contributions.1 The Eleventh Federal Reserve District consists o Texas,

northern Louisiana and southern New Mexico. Texas accounts

or 95 percent o the Eleventh Districts output.2 The Feds ability to lower real interest rates was greatly

inhibited by the zero bound and alling ination rates during

the recession.3 See This Time Is Different: Eight Centuries of Financial

Folly, by Carmen Reinhart and Kenneth Rogo, Princeton,

N.J.: Princeton University Press, 2009, or subsequent work,

Ater the Fall, by Carmen and Vincent Reinhart, paper

presented at the Kansas City Economic Symposium, Jackson

Hole, Wyo., Aug. 27, 2010, www.kansascityed.org/publicat/

sympos/2010/2010-08-17-reinhart.pd.4 Policymakers had to work with real-time data that, in this

case, underestimated the extent and seriousness o the

downturn. The initial estimate o real GDP perormance was

subsequently lowered to 8.9 percent or ourth quarter 2008

(rom 3.8 percent) and to 6.7 percent or frst quarter 2009

(rom 6.1 percent) in the latest GDP revisions, released in

July 2011. Indeed, the Business Cycle Dating Committee at

the National Bureau o Economic Research (NBER) did notofcially date the beginning o the recession until December

2008, a ull year ater the recession was deemed to have

begun in December 2007.5 The American Economic Association is the worlds largest

organization or economists. See The Long Slump, by

Robert Hall, AEA presidential address, American Economic

Review, April 2011, p. 467.6 See Federal Reserve Liquidity Programs: An Update, by

Niel Willardson and LuAnne Pederson, Federal Reserve Bank

o Minneapolis The Region, June 2010.7 See Regulatory and Monetary Policies Meet Too Big to Fail,

by Harvey Rosenblum, Jessica J. Renier and Richard Alm,

Federal Reserve Bank o Dallas Economic Letter, vol. 5, no. 3,

2010, www.dallased.org/research/eclett/2010/el1003.html.8 This analysis abstracts rom the act that Texas is home

to branches o some o the nations largest banks, a ew o

which required extraordinary ederal government assistance

during the fnancial crisis. See note 7. For earlier analysis at

the regional level, see What Reorms Are Needed to Improve

the Saety and Soundness o the Banking System? Harvey

Rosenblum, Federal Reserve Bank o Atlanta Economic

Review, vol. 92, nos. 12, 2007, pp. 10113.9 For data on negative equity, see CoreLogic frst quarter 2011

negative equity report, June 7, 2011, www.corelogic.com/

about-us/news/asset_upload_fle726_7102.pd.10 For more Texas housing details, see Texas Housing

on Bumpy Road Ater Stimulus Eects Fade, by DAnn

Petersen and Adam Swadley, Federal Reserve Bank o Dallas

Southwest Economy, Second Quarter 2011, www.dallased.

org/research/swe/2011/swe1102b.cm.11 For more on Texas household debt burdens and the outlook

or Texas relative strength, see Texas Economy to Ride

Higher in the Saddle in 2011, by Keith R. Phillips and Emily

Kerr, Federal Reserve Bank o Dallas Southwest Economy,

First Quarter 2011, www.dallased.org/research/swe/2011/

swe1101b.cm.12 See Industry Clusters Shape Texas Economy, by Laila

Assanie and Mine K. Ycel, Federal Reserve Bank o Dallas

Southwest Economy, no. 5, 2007, www.dallased.org/

research/swe/2007/swe0705b.cm.13 See Oil and Gas Rises Again in a Diversifed Texas, by

Mine K. Ycel and Jackson Thies, Federal Reserve Bank o

Dallas Southwest Economy, First Quarter 2011,

www.dallased.org/research/swe/2011/swe1101g.cm.14 See New Tool Gauges Impact o Exchange Rates on

States, by Keith R. Phillips, Steve Brzezinski and BarbaraDavalos, Federal Reserve Bank o Dallas Southwest Economy

Fourth Quarter 2010, www.dallased.org/research/swe/2010/

swe1004b.pd.15 See Keys to Economic Growth: What Drives Texas? by

Jason Saving, Federal Reserve Bank o Dallas Southwest

Economy, First Quarter 2009, www.dallased.org/research/

swe/2009/swe0901c.cm.16 See Lie on the Line, by Andrew Rice, New York Times

Magazine, July 28, 2011.


8/20

OnTheRecord

SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS THIR D QUARTER 20118

Shiting rom World Population Explosion to Global Agin

A C o n v e r s a t i o n w i t h J o s e p h C h a m i e

Joseph Chamie, former director of the United Nations Population Division, is research

director of the New York-based Center for Migration Studies. He spoke at therecent Federal Reserve Bank of Dallas conference Immigration Policy in an Era of

Globalization, taking time out during his visit to discuss world demographic trends.

Q. How is the worlds population evolving?What are the long-run trends in world populationgrowth? What countries are growing, declining?

A. Two thousand years ago, world populationwas estimated at about 300 million. It reachedthe rst billion mark at the beginning o the19th centurythe estimate is about 1804when Thomas Jeerson was U.S. president.The second billion mark was reached in1927. We had a tripling o world populationrom 1927 to near the end o the 20th cen-tury, when it reached 6 billion. Were now ap-proaching 7 billion people.

Why did that happen? Its because wehad this wonderul thing occur: a decline inmortality rates. This decrease in mortality ishumanitys greatest achievement. Every gov-ernment wishes to see lower mortality and

longer lie. The world beneted rom mod-ern medicine and public health; antibiotics,o course; also better nutrition, better acili-ties, better working conditions. What laggedbehind were changes in birth rates. This di-erence between birth rates and death ratesgave rise to what is commonly called thepopulation explosion. We reached a peakpopulation growth rate o about 2.1 percentin the late 60s, and we reached the peak an-nual increase o about 87 million people inthe late 80s. The latest United Nations pro-jections show a world o about 10.1 billion

people by the end o the 21st century.Some regions and countries are growing

slowlysuch as Europe, Japan and Korea;others are growing rapidlysuch as Arica,Niger, Mali, Uganda and many other sub-Saharan countries. And we have other coun-tries growing moderately, but because otheir vast size, such as India, theyre adding agreat number o people, with India account-ing or roughly 22 percent o the worlds an-nual growth. India alone will probably addhal a billion people in the next 50 years,

making it ar bigger than China. It will over-take China probably in 10 years and willcontinue growing. Chinas population is pro-jected to peak at 1.4 billion around 2025 andthen begin slowly declining unless authori-ties change their one-child policy and ertil-ity rebounds above the replacement level otwo children per woman.

Q. What is behind the increasing populationgrowth rate?

A. Historically, even beore biblical times, iyour community didnt go orth and multiply,then disease and other actors would likelywipe you out. So every group had doctrinesand principles advocating having many chil-dren. With the decrease in mortality, childrensurvived and you didnt have them dying ininancy or childhood. The general trend hasbeen that birth rates lag behind death rates.

Fertility rates rst started coming down

in Western Europe with the Industrial Revo-lution. A number o things push amilies toreduce their amily size. First, death rateshave to come down. Second, people moveinto cities, with smaller-size living arrangements. And they move to manuacturingrom agriculture. That makes the childrenless valuable as a labor supply; they do ewer useul work-related activities in the cityOn arms, they are valuable doing tasks evenat ages 6, 7 and 8. Third, there is increasing education. We invest in the quality othe children rather than the quantity o thechildren. Fourth, with increasing education

we have people delaying marrying, delaying childbearing and then participating inthe workorce. We have girls and womenentering public schooling and college andsubsequently being employed. This contributes greatly to decreasing ertility ratesWith economic independence, women maychoose not to get married and not to haveamilies. We also have government programsnow providing old-age assistance and sociaservices, so you dont need to rely on children in old age.

Q. What types o policies do governmentsenact to either encourage or control populationgrowth? What is the uture o Chinas one-childpolicy?

A. All countries have population policiesFor example, every country has a policy toimprove health and decrease mortality. Theexample that comes to mind most oten isertility-related policies: Can we encouragepeople to have children; can we discouragepeople rom having children? These are sensitive issues, and these are the issues that oten

catch the headlines o newspapers. With re-gard to Chinas one-child policy, it has contributed to its population stabilization, or itsprojected stabilization. Fertility was comingdown even beore the one-child policy, andthe one-child policy probably contributed tothe decline. I believe that Chinese leaders aregoing to loosen the one-child policy, perhapsin gradual stages, mainly because o the rapidaging o the population and reductions in thesize o its labor orce. As the economy contin-ues to expand, the benet the Chinese have



Between now and midcentury, something on the order

o 70 percent o U.S. population growth will be due to

immigrationthe immigrants and their descendants.

had o a very active labor orce, a large labororce and a relatively small elderly population

will change and there will be increasinglylarger proportions o the population in theolder age groups and a contraction in the sizeo the countrys labor orce.

Q. How does immigration policy interact withpopulation trends? Do governments reachout to welcome immigrants to buttress theirpopulations (Australia, Canada)? Or not (Japan)?Why not?

A. Immigration is a very important issue. Iyou move people rom one part o the worldto another, it might aect the ertility ratesin both sending and receiving countries, butglobally the eect is small. About 214 millionpeople live outside o the place where they

were born. Its a relativelysmall proportion: 3 to 4

percent o the total popu-lation o the world. But ithas had a big impact in cer-tain areas. I immigration tothe U.S. had stopped at itsounding, when it declaredindependence on July 4,1776, and U.S. demographic growth de-pended on natural increases, the populationwould be hal o what it is today. Betweennow and midcentury, something on the ordero 70 percent o U.S. population growth will

be due to immigrationthe immigrants andtheir descendants. In some Persian Gul coun-tries, immigrants are 70 to 80 percent o thelabor orce. O course, those oreign workersarent supposed to stay; theyre supposed to

return to their home countries. Similarly, inEurope, where the ertility rate is low, immigrants have a large impact on the growth othe population and the labor orce. Withouimmigrants in many o these countries, thei

labor orces would decrease even more rapidly and their populations would shrink. Youwould also have a much more rapid agingo the population in countries such as ItalyGermany, Russia, Spain and Greece.

Q. Youve said it would be helpul or people in the U.S. to see a map with relative-population sizes depicted. Why?

Courtesy o Benjamin D. Hennig, University o Sheield.

A. When you look at a regular map, it distorts things, especiallythe fat map. Many people start thinking Greenland is as big asSouth America. Most people oten have diculty seeing the totalpicture unless its presented graphically. You would see Americaas a very large land mass thats very blessed with a lot o resourc-

es, with a relatively small population compared with India andChina and other densely populated areas. A map with relative-population sizes gives us more o a global appreciation o wherewe stand and what we could be doing.



Japan and South Korea have been reluc-tant to bring in immigrants because they eelthere are certain benets to having a rela-tively homogeneous population. As a con-sequence, they ace population decline andrapid population aging. There has also beena surge in groups trying to limit immigrationto European countries, such as the U.K. andGermany, rom outside the European Union.You may have heard [French President Nico-las] Sarkozy, [German Chancellor Angela]Merkel and also [British Prime Minister Da-

vid] Cameron say multiculturalism has ailedin their countries.

Q. What can nations that ace decliningpopulations do? What is replacement migration?

A. There are ew models o sustained eco-nomic growth without a growing population.I you have a population thats either stable ordeclining, you may start going abroad seek-ing a larger market. I youre concerned aboutthe labor orce, you may nd that the labororce is getting smaller and, thereore, youll

move your operations overseas. Some coun-tries are concerned about those matters andare trying to raise ertilityJapan, Korea, Sin-gapore, Italy, Greece, Spainand theyre pro-viding incentives to couples to have children.You get cash bonuses; others have said wellget you an advance in the queue or hous-ing, or well give you better loan rates. Otherstalk about incentives such as ree preschool,aterschool and day school. Some o the er-tility rates are almost hal o whats neededor replacement1.2, 1.3 as opposed to 2.1

children per woman. Somecountries are even closer to

1, meaning a single child percouple.

Because o the pres-sure on the economy, someo these countries are bring-ing in oreign workers, someon a temporary basis. Weretalking about South Ko-rea, Singapore, Japan, Italy,Spain, Germany and Russia, where population will bedeclining. But the number

o immigrants they wouldhave to bring in to oset the population de-cline would likely overwhelm the country.Its ar beyond what the political system inthese countries could tolerate. Were talkingabout millions o migrants every year or de-cades because the decit in the number obirths is very large.

Q. What are the greatest challenges posedby populations continuing to relocate to urbanareas? What are the benefts o the shit?

A. The worlds population became predomi-nantly urban several years ago. This changehas enormous implications or the worldeconomic activities, services, culture, politicsand amily size. It will also have an impact onthe interactions o people. It particularly ben-ets women, who, by moving to cities, ndgreater economic, cultural and political ree-doms. It also produces other benets, such asconcentrations o museums and libraries. Itsnot problem-ree. It means redesigning lie-styles. You have to understand youre livingin crowded areas, you need public transport,

public saety, public health systems, sewersand so on.

Also, urban centers have a dramatic im-pact on political lie. In rural areas, i you ob-ject to something and you start marching in aeld, you might get the attention o a coupleo cows. I youre marching in a city like NewYork, London or Calcuttahowever outrageousyour poster isthere will be some people whoagree with you and start marching with you.This means tremendous changes in the politicalchemistry in parliaments and congresses.

Q. How important is the evolving role o womenin global demographic shits? What other trendsare particularly notable?

A. For centuries, women have been relegatedto the home, doing domestic chores including, o course, bearing children and rearingthem. Starting in the 19th century and accel-erating in the second hal o the 20th centurywomen have acquired political rights, theyvejoined the labor orce in increasing numbers and theyve begun interacting sociallyon equal levels with men. These importanchanges are spreading around the world and

have proound consequences or our livesNot only is this appropriate in terms o human rights, its also beneting the world because we are increasing the talent, the brainpower, the skills and the knowledge we haveto deal with the worlds problems.

While the 20th century was the centuryo demographic growth (and this growthwill continue through the 21st centuryweare likely to add 2 to 3 billion people), theworlds population is aging. Very soon, we will see a reversal where the number ochildren, which has historically been more

than the number o people above 65, wilbecome less than the elderly. The aging othe worlds population will be pervasive; iwill aect every household. It will aect theeconomy, social interactions, voting patternsliestyles.

Finally, we are seeing changes in theamily. In the past, most peoples image wasather, mother and children living togetherThis classic image, portrayed so eectivelyin the past on television and in movies, isnow changing. We are seeing more peoplecohabitating, not getting married, especially

in the developed world. We are seeing increasing births out o wedlock; we are seeing increasing levels o divorce and separa-tion in many countries. And we are seeing aspread o same-sex marriages, which prioto the 21st century was unthinkable.

The aging o the worlds population will be pervasive;

it will aect every household. It will aect the econo-

my, social interactions, voting patterns, liestyles.



Mexico Rides Global Recovery

but Still Faces HurdlesBy Jesus Caas, Roberto Coronado and Robert W. Gilmer

The Mexican economy has grown robustlyollowing the worst recession since thepeso crisis o 1994. Gross domestic product(GDP) growth surged 5.4 percent in 2010,surpassing expectations. Though the paceo expansion slowed in early 2011 as theU.S. engine sputtered, orecasts call or aslight pickup in the second hal.1

The recovery is the product o primari-ly three actors: rst, a rebound in manuac-turing exports, mostly to the U.S. but also toother markets; second, a strengthening in-ternal market ueled by a healthy domesticnancial sector; and third, signicant capitalinfows rom advanced economies seekinghigher rates o return in emerging marketssuch as Mexico.

In spite o the recovery, the countryaces signicant challenges both in the shortand long run, including the worst violencesince the Mexican Revolution.

Export-Led RecoveryMexicos rebound began in summer2009, led by manuactured goods exports tothe U.S., where the recession had ended thatJune. Factory production accounted or 82percent o Mexican exports in 2010, with oilrepresenting 14 percent and mining and agri-culture 4 percent. The U.S. took in 80 percento all Mexican exports.2

Mexico has increasingly looked glob-ally, especially to ast-growing developingcountries such as China, Brazil and Colombia,to oset its largest trading partners rela-

tively slow growth. Activity with the rest othe world jumped 152 percent rom 2000 to2010, while exports to the U.S. expanded 28percent (Chart 1). Though non-U.S. exportsaccounted or just 20 percent o the Mexicantotal in 2010, sales to developing nationsbounced back rom the recession urther andaster than exports to the U.S.

Domestic Demand RisesRapid revival o internal markets is an

important part o Mexicos recovery. Both

bank lending and employment are drivingpersonal consumption higher.

Damage to the domestic banking indus-try was limited, and unlike in the U.S., therewas no housing crisis or excessive consumerdebt. These actors allowed the quick resto-ration o broad-based bank lending that nowexceeds precrisis levels (Chart 2). Mortgagelending barely paused during the global cri-sis, while commercial lending slowed beore

expanding in 2010 and early 2011.Consumer lending, mostly involving

credit cards, contracted signicantly dur-ing the crisis. It began to rebound in early2010 but remains roughly 20 percent belowprerecession peaks. One positive: Lendingor consumer durables has recovered toprecrisis levels.

The job market quickly responded tothe recovery. Formal employmentjobs withgovernment protections and pensionsgrew

The central question is not

i Mexico can expand, but

whether it can do so ast

enough to signifcantly

improve living standards.

Chart 1Mexicos Non-U.S. Exports Take O

Index, January 2000 = 100*

Exports to rest of world (20%)

Total exports

0

50

100

150

200

250

300

350

400

201120102009200820072006200520042003200220012000

Exports to U.S. (80%)

* Real, seasonally adjusted.

NOTE: Percentages refect share o Mexican exports.

SOURCES: Banco de Mxico; authors calculations.



Chart 3Recovery Marked by Strong Job GrowthPercent Index, January 2002 = 100*

12

10

8

6

4

2

0

2

4

6

8

10

20112010200920082007

103

104

105

106

107

108

109

110

Average wage index*

Employment (annual change)

* Real.

SOURCES: Instituto Mexicano del Seguro Social; authors calculations.

Chart 2Bank Lending Surpasses Precrisis Levels

Index, 2007 = 100*

Mortgage (17%)

40

60

80

100

120

140

160

2011201020092008200720062005

Commercial (22%)

Total

Consumer (19%)

* Real.

NOTE: Percentages refect share o lending; industrial, government and other lending categories not shown.

SOURCES: Banco de Mxico; authors calculations.

by 700,000 positions in 2010, the best yearsince 1998. Mexico added another 280,000jobs rom December 2010 through June, andormal-sector average wages neared precrisislevels (Chart 3).

Led by consumer lending and em-ployment growth, real (infation-adjusted)personal consumption moved upward be-ginning in rst quarter 2010, expanding at

an average rate o 5 percent per quarter.Additionally, retail sales, which ell 7.8 per-cent during the downturn, are now within 2percentage points o the prior peak.

Investment Resilient Despite ViolenceMexicos higher rates o return vis-

-vis advanced economies have attractedsignicant fows o oreign direct and port-olio investment.3 Portolio investment suchas publicly traded debt and stock reached$24 billion in 2010, surpassing oreign

direct investment (FDI) or the rst timesince 1993. Partly as a result, the peso hasappreciated 10 percent against the dollarsince December 2009.

The relatively strong currency helpedmitigate infation pressures rom high com-modity prices, allowing Banco de Mxicoto keep its benchmark lending rate at arecord low 4.5 percent or two years. Theaccommodative monetary policy permit-ted quick restoration o domestic businessinvestment, with spending in constructionand machinery and equipment growing

or almost two years. A recent central banksurvey o Mexican business executivesindicated that the current environment islikely to encourage urther investment incoming months.

FDI has also contributed to the recov-ery, bouncing back in 2010 ater allingin 2008 and 2009. It totaled $19 billionin 2010, up 20 percent rom the previousyear, but is still 40 percent below 2007levels. Despite unprecedented, drug cartel-related violence, particularly along thenorthern border, 42 percent o FDI was

channeled to states adjacent to the U.S.Five o the most violent states, Baja Cali-ornia, Chihuahua, Durango, Nuevo Lenand Tamaulipas, were among the countrystop 10 FDI recipients in 2010 (Chart 4).

Maquiladoras, or oshore manuactur-ing plants, have a strong presence alongthe U.S.Mexico border and, consequently,are responsible or a signicant share oFDI.4 More than 140,000 jobs have re-turned in these export-oriented acilitiesalong the border since December 2009.

The auto and electronics sectors accountor the majority o maquiladora activity innorthern Mexico. Ater China joined theWorld Trade Organization in 2001, severalmaquiladoras closed as Chinas lower wag-es lured away production. However, recentanecdotal evidence suggests that someplants have returned to northern Mexico.

There are several explanations or thisemerging trend. First, higher energy pricesraise transportation costs or products

headed to the American market. Second,consistent Chinese worker pay increaseshave narrowed the wage gap betweenChina and Mexico. Third, while the pesohas recently appreciated against the dollar,Chinas currency has retained its strengthagainst its U.S. counterpart. Finally, anec-dotal evidence suggests that China hasntconsistently delivered the quality standardso Mexico, especially within the transportation and high-tech electronics sectors.



Chart 4Foreign Direct Investment Flowing Despite Violence(Mexicos top 10 state recipients in 2010)Millions o dollars

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

DurangoTamaulipasSan LuisPotos

QuertaroBajaCalifornia

Estado deMxico

JaliscoChihuahuaNuevoLen

DistritoFederal

SOURCE: Secretaria de Economa.

Immediate ObstaclesPotential challenges conront the

Mexican recovery, ve o them in the nearterm.

Signicantly, Mexicos economy re-mains coupled to the U.S., which still su-ers rom uncomortably slow growth eventhough demand or durable goods suchas autos, home appliances, televisions and

other consumer electronics led the Mexicanmanuacturing export rebound. The U.S.aces the combined eects o the Japaneseearthquake on global manuacturing, thehousing markets inability to nd a deni-tive bottom and spillover rom the Euro-pean sovereign debt crisis. This sot patchhas quickly extended into Mexico, whereprivate-sector analysts have revised downtheir orecasts or 2011 GDP growth.

Second, developing nations that bu-ered Mexico rom U.S. sluggishness nowace their own threats. Rapid growth, capital

infows and higher commodity prices havebred infation in several countries. As thesenations tighten monetary policy and rein inbank lending to slow their economies, theyrisk overshooting and reducing growth toomuch. Conversely, policymakers may not besuciently vigilant in controlling infationand risk harming development and longer-term growth. A potential emerging-marketcooldown would, in turn, slow Mexicanexports.

Third, while it appears escalating vio-

lence hasnt yet signicantly slowed invest-ment, it may take a toll on the economy inthe near uture, particularly among smallbusinesses. Mexicos central bank recentlypublished its rst regional economic re-port.5 It highlights northern Mexico as theastest-growing region and one where morethan 68 percent o companies have beentouched by organized crime. Extortion,

which local media as well as anecdotal evi-dence suggest has accelerated, has causedsmall-business closures.

Fourth, to the extent Mexico conrontsthe rising infationary pressures notedin other emerging-market economies, itscentral bank will need to step in, possiblyslowing the recovery and braking growth inthe short run. The countrys comortable s-cal positiona budget decit o around 2.5percent o GDP and public debt at about 35percent o GDPwill acilitate central bankmovement toward monetary tightening, i

needed.Fith, capital fows could potentially

reverse amid global investor ckleness,weakening the peso, driving up interestrates, depressing asset prices and reduc-ing unding availability. Policymakers havetwo main weapons to combat capital fight:international reserves and an InternationalMonetary Fund contingent credit line. Bycombining the two, Mexicos central bankhas around $200 billion in reserves to de-end the peso, i needed.

Longer-Term ChallengesThe development o oil production,

which is critical to government nances,and the implementation o structural eco-nomic reorms lead the list o medium- tolong-term challenges conronting Mexico.

The country is the worlds seventh-largest oil producer, though output has de-clined about 24 percent rom its 2004 peak.

Production is contracting twice as ast asexpected at Cantarell, national oil companyPemexs largest eld. Oil exports accountor about 40 percent o public revenue,with higher prices osetting tumbling pro-duction. Nevertheless, the combined eectso alling prices and accelerating oil outputdeclines could signicantly depress govern-ment nances. Mexico may need to openits energy sector and expand production byallowing oreign capital.

Mexico successully implemented sev-eral economic reorms during the secondhal o the 1980s and the early 1990s, mostnotably privatization o some governmententerprises, trade liberalization and deregu-lation. Mexico has enjoyed macroeconomicstability, thanks largely to an independentcentral bank and scal discipline.6 Howevera large inormal sector (characterized byo-the-books businesses outside govern-ment regulation), tax loopholes and weakcompetition in key industries such as tele-communications must be addressed in anew round o structural reorms i Mexico

is to achieve greater economic growth and,ultimately, a higher living standard.

Mexicos inormal sector is a drag onthe countrys economic development. Bysome estimates, it accounts or as much asone-third o Mexicos $1 trillion economy.Inormal-sector rms lack access to creditand legal protectionslimiting their abil-ity to innovate and grow. Labor inormalityalso suppresses the accumulation o humancapital required or sustainable economicgrowth.7 Finally, the inormal sector paysno taxes. Mexicos tax revenue totals only

20 percent o GDP. That gure drops to 12percent when oil revenues are excludedrom the calculation.8 To secure medium-term sustainability o public nances, scalreorm must achieve a more ecient taxsystem less dependent on oil.

In addition to the challenge posed bya large inormal sector, key industries lackmeaningul competition. Mexico startedprivatization o its public sector during the90s. Unortunately, the eort was fawed

(Continued on back page)



NoteWorthyQUOTABLE: While sectors of the regional economy tied to consumer

activity such as housing and retail sales have weakened, they appear to be

performing better in Texas than in other parts of the country.

DAnn Petersen, Business Economis

TEXAS AGRICULTURE: Cotton, Bee Exports Higher on Global Demand

OIL PRICES: Muted Reaction as Strategic Reserve Release Falls Short

Texas agriculture and ood exports soared 45.9 percentduring the nal three months o last year and another 41.3

percent in the rst quarter o this year, refecting high com-modity prices and increasing global demand.

The data or the rst months o 2011 dont yet refect theimpact o a statewide drought that has diminished crops andlivestock ood sources.

Texas is the nations No. 1 cotton producer and exporter.The value o U.S. cotton exports rose 35.9 percent in 2010and advanced 18.1 percent in the rst our months o thisyear. Cotton prices rose 12.2 percent in the rst ve monthso the year and 103.3 percent on a year-over-year basis inMay. A severe world cotton shortage, coupled with an im-proving global economy, boosted cotton prices, the U.S.

Department o Agriculture (USDA) said. China, the leadingimporter o U.S. cotton, received 5 percent o total Texas

exports in rst quarter 2011.Texas also leads U.S. bee production. The value o bee

exports increased 36 percent in 2010 and rose 7.1 percentin the rst our months o this year, according to USDA datacompiled by the U.S. Meat Export Federation. Steer pricesadvanced 6.8 percent year-to-date through May, while retailbee prices reached record nominal (non-infation-adjusted)highs each month rom February through May 2011. Bee,like cotton, beneted rom the strengthening world econo-my, which increased demand. Shrinking herds in the U.S. andCanada also pushed prices higher.

Adam Swadley

The International Energy Agency (IEA) announced onJune 23 that its 28 member countries would release 60 millionbarrels o oil rom their reserves, only the third such draw-down ever. The prior two occurred at the beginning o theGul War in 1991 and ater Hurricane Katrina in 2005. The U.S.said it would tap the Strategic Petroleum Reserve to contribute30 million barrels to the latest eort.

The IEA became concerned that rising oil prices spurredby reduced Libyan production since March could slow eco-nomic growth and stife the budding recovery. However, thedesired outcome o the releaselower oil pricesdidntoccur. While the price o West Texas Intermediate crude oilinitially dropped 4.6 percent ollowing the announcement,and Brent crude declined 5.3 percent, prices subsequently re-

turned to previous levels.This response may refect oil sales rom reserves substan-

tially less than the announced 60 million barrels. Because parto the release was to come in the orm o lower government-mandated holding requirements in Europe and Japan, wherethe amount o oil kept in inventory typically exceeds the re-quirements, reserve sales were less than anticipated. The actu-

al amount o oil sold should, instead, total around 38 millionbarrels, just less than two-thirds o the announced amount.

Even i prices remained suppressed, the reserve releasewould have a limited eect on long-term prices because it is atemporary measure intended to tide markets over until Libyanproduction resumes or Saudi Arabia increases output.

Jackson Thies

EDUCATION: Hispanic Students Score Higher in Texas, but Progress Stalls

Texas Hispanic students in the ourth and eighth gradesperorm better on reading and math tests than their coun-terparts nationally, though the dierence between them nar-rowed over the past two years, according to a June report bythe National Center or Education Statistics.

Hispanic students in Texas tend to score higher becausea greater proportion are U.S. born69 percent compared with63 percent nationally. Native-born students tend to have great-er English prociency and less requently live in poverty thantheir oreign-born counterparts. Paradoxically, adult Hispanicsin Texas average less educational attainment than Hispanics in

the rest o the nation.Hispanic ourth graders in Texas improved their math

scores by 13 percent and reading by 6 percent rom 1992 to2007. While Texas maintained its lead on average test scoresamong Hispanics, actual scores declined or remained rela-tively unchanged rom 2007 to 2009.

Nationally, including Texas, Hispanic students test scoreshave consistently been 90 percent o non-Hispanics whitesresults since testing began in the early 1990s.

Hispanics made up 22 percent o national public schoolstudents and 49 percent o Texas students in 2009. Amongmajor minority groups, Hispanics are the astest-growing andtheir scholastic achievement portends the uture qualicationso Americas workers.

Yingda Bi


15/20

SpotLight

15FEDERALRESERVEBANKOFDALLAS THIRDQUARTER2011 SouthwestEconomy

Mexicos nancial markets have surgedsince 2010, recovering rom the global -nancial crisis and beneting rom new capi-tal instruments and rules. Among the mostprominent instruments are Certicados deCapital de Desarrollo (CKDs), or trust securi-ties, and the countrys rst real estate invest-ment trust.

Additionally, modernization o Mexi-cos market operations has helped drive ini-tial public equity oerings (IPOs) and debtissuance.

New Securities Make MarkThe Bolsa Mexicana de Valores, Mexi-cos stock and securities market, introducedCKDs in August 2009. These securities undthe development o specic existing or u-ture projects, oten some type o construc-tion, approved by the issuing trusts techni-cal committee.

In the rst 20 months ater approvalo the instrument, there were 15 oerings,raising $3.2 billion, or 38.4 billion pesos(Chart 1). Fity-three percent o the oeringsunded inrastructure, 25 percent real estate

and 22 percent businesses (mostly mediumsized). The CKDs structure allows invest-ment in either an individual rm or multiplerms, so even medium-sized companies thatlack the resources or a public oering canobtain unding.

A CKDs value is tied to project success,with returns derived rom dividends or saleso shares in underlying trust assets. Pay-ments to CKD holders come rom incomeearned by the project or business, includ-ing the amortization o principal and inter-est, dividends or sale o the project or rm.

Under revised Mexican regulations aimedat boosting sources o capital or long-termconstruction and development, pensionunds may invest in CKDs. Overall, pensionshave provided approximately 90 percent oCKD unding. Ten additional CKD issuancesworth $1.4 billion, or 16.7 billion pesos, arein the pipeline this year.

Real Estate Investment Trusts ArriveMexicos rst real estate investment

trust (or Fibra, the Spanish acronym or Fi-

deicomiso de Inra-estructura y BienesRaces) came to mar-ket in March. The ini-tial listing, Fibra Uno,raised $302 million(3.62 billion pesos).Fibra Uno consists o16 properties, includ-ing malls, oces andindustrial sites. Therewere 883 subscribers,with Mexican citizens

buying 77 percent othe oering. Authorities be-

gan making the nec-essary legal and scalchanges to permit theormation o Fibrasin 2004. To qualiyas a Fibra, at least 95percent o the returns must be distributedto investors, and a minimum o 70 percento holdings must be in real estate.1 Perhapsthe most important regulatory change was

put into place at the end o 2009 when newrules liberalized the permissible investmentmix or pension and insurance unds.2

Bolsa Modernization Bears FruitIn addition to the new instruments and

record capital infows or securities, Mexicanmarkets have been bolstered by exchangemodernization. Under rules implemented inAugust 2010, brokerages will have multipleaccess points to the electronic trading sys-tem instead o just one. Previously, orderswere executed one at a time according to

size. The new system is expected to increaseeciency and liquidity, while generatingmore orders and greater investment.

The modernization seems to be payingdividends. Debt issuance through Mexicosstock market reached unprecedented lev-els in 2010, ollowing two years o relativeinaction. According to the Bolsa, nancingtotaling $3.5 billion (43.8 billion pesos) wasraised during 2010. The trend continued thisyear, with debt issuance growing 40 percentin April on a year-over-year basis.

The debt market has proven a viablesource o unding or local rms o all sizesBolsa modernization and new rules allowingpension unds to directly invest in the stock

o Mexican companies helped ignite a waveo IPOs. Ater two years with no new listings, six companies went public in 2010 andanother 11 are expected to do so this year.

Although Mexicos capital markets remain small and relatively vulnerable, recendevelopments herald a deeper and more vibrant role or nance in the countrys economic development.

Edward C. Skelton

Notes1

In the U.S., real estate investment trusts (REITs) must paydividends totaling at least 90 percent o the REITs taxable

income and must invest a minimum o 75 percent o their

holdings in real estate. Fundamentally, there is no dierence

in structure across the two countries.2 In Mexico, pension und companies are the largest

institutional investors, with 42.2 million accounts and 1.6

trillion pesos in assets under management as o May 31,

2011.

New Instruments, Rules Boost Capital InvestmentMexican Financial Markets

Chart 1New Capital Instrument, the CKD, Takes O

0

5

10

15

20

25

30

2011(projected)

2011(through April)

20102009(September

through December)

Number of CKDs issued Value (billions of pesos)

SOURCE: Bolsa Mexicana de Valores.



Underemployment Poses

Long-Term Financial Risk

to More WorkersBy Anil Kumar and Michael Weiss

The underemployed and the

discouragedthose who have

given up trying to fnd work

are additional indicators olabor dislocation.

In the atermath o the Great Recession,a signicant portion o the potential laborpool remains largely unnoticed. The un-deremployed and the discouragedthosewho have given up trying to nd workareadditional indicators o labor dislocation.These are individuals whose diminishingskills and reduced earning capacity maylinger well into the recovery.

For every ve unemployed Texans lastDecember, our others either were under-employed (working 35 hours or less whilereporting they sought ull-time jobs) or hadsought work but quit looking, according tothe Bureau o Labor Statistics (BLS) CurrentPopulation Survey (Chart 1).

Nationally, the underemployment rate,which varied considerably across states, aver-aged 6.4 percent or 2010, with unemploy-

ment accounting or another 9.6 percent.1

Texas, with a 5.7 percent underemploy-ment rate, ared better than the nation andmost other states, including the traditionalSunbelt growth statesGeorgia, Florida andArizona. The latter two were especially hard-hit by the residential building bust, a lesseractor in Texas.

I wages were completely fexible andlabor markets perect, unemployment andunderemployment would be largely transi-tory and low: When the number o willingworkers exceeded the number o jobs, wageswould all, reducing labor costs and makingit protable or companies to hire. Yet, manyimperections can keep wages rom adjustingreely, and unemployment and underemploy-ment can rise, particularly during economicdownturns.

Chart 1Texas Underutilized Labor Force ExpandsThousands*

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Marginally attached

Discouraged workers

Underemployed

Unemployed

100908070605040302010099

* 12-month moving average.NOTES: Discouraged workers are a subset o the marginally attached. Shaded bars indicate Texas recessions.

SOURCES: Basic monthly Current Population Survey, Bureau o Labor Statistics; authors calculations.



Even as unemployment

shows signs o easing, the

upward trend o discouraged

workers, as a percentage othe Texas labor orce, remains

little changed, pointing to a

still-nascent recovery.

Underscoring recent market slack, thetop-line unemployment rate or the nationreached a postwar high o 10.1 percentin October 2009. Nationally, the joblessrate rose nearly twice as much in 2009 aspredicted by Okuns law, which links ris-ing unemployment with alling nationaloutput. Such perormance is indicative ohighly disproportionate job loss relative to

the decline in economic activity.2

Underemployment CountsTo ully capture labor orce slack, the

BLS constructs six measures o underuti-lization. The broadest includes the unem-ployed, the underemployed and those theLabor Department categorizes as margin-ally attachedpeople who unsuccessullysought work at some point in the past 12months but not in the past our weeks.Together, they totaled 14.4 percent o thecombined total Texas civilian workorceand marginally attached in 2010. That com-pared with 22.1 percent o such workersin Caliornia, 23.6 percent in Nevada anda U.S. average o 16.7 percent. In 2006, asthe economy boomed beore the recession,Texas underemployment averaged 2.9 per-cent, with a total o 8.6 percent includingthe unemployed and marginally attached.

Discouraged workers are a subset othe marginally attached. These are peopleout o the labor orce because no employ-

ment is available, they couldnt nd workor they have given up, perhaps becausethey think they are too young or too oldor sense some other orm o discrimina-tion. O the Texans marginally attached aso December, about 45 percent (on a non-seasonally adjusted basis) were discouragedworkers, compared with more than 50 per-cent nationally.

Even as unemployment shows signso easing, the upward trend o discouragedworkers, as a percentage o the Texas labororce, remains little changed, pointing to astill-nascent recovery (Chart 2). However,compared with the nation, Texas retains anadvantage in all measures o labor orceunderutilization (Chart 3).

This labor orce underutilization oc-curred in tandem with the historic rise inlong-term unemployment as people, othe job or more than six months, stoppedlooking or work and became marginallyattached or settled or part-time work as astopgap, adding to the ranks o the under-employed. The persistence o unemploy-ment is refected in the average number oweeks that the jobless are out o work. Thenational gure, compiled since 1948, stoodat a seasonally adjusted 36.9 weeks in Janu-ary, a record. That is more than 50 percentgreater than the next-highest, 20.8 weeksin June 1983 ollowing the recession o theearly 1980s.

Chart 2Joblessness Eases in Texas, but Ranks o Discouraged Workers Continueto Rise During Recovery

Percent* Percent*

0

1

2

3

4

5

6

7

8

9

100908070605040302010099

0

.2

.4

.6

.8

1

1.2

Unemployed

Discouraged

* 12-month moving average.NOTE: Shaded bars indicate Texas recessions.




Lowered EarningsTo be sure, joblessness and under-

employment are an integral part o labormarket reallocation, as rms and work-ers each seek an optimal situation. Someunemployment can exist while workerscanvass the marketplace to determine orwhom they want to work. Short periodso unemployment can enhance economiceciency i, in the process, poor matches

between rms and workers are replaced bybetter ones. This rictional unemployment isdistinct rom cyclical unemployment, whichis largely involuntary and oten results inuture earnings losses.

A negative correlation between un-deremployment and uture earnings isevident when annual average real weeklyearningsobtained rom the monthly Cur-rent Population Survey or the U.S. or 1998through 2010are plotted against the in-cidence o job loss and underemploymentamong groups dened by age, race, sex

and year (Chart 4).The negative association between

underemployment and the subsequentyears earnings is more pronounced orworkers with a college degree (seen inthe steeper downward line) than or thosewho dropped out o high school. A similarrelationship holds or older workers (55+years), suggesting that these groups suerthe greatest job quality deterioration.

Erosion o earnings and job quality,particularly among the highly educated and

older workers, is not surprising. Employedworkers accumulate two types o skillsgeneral skills applicable at a variety o jobsand nontranserable company-specic pro-ciencies accumulated through experienceand training. Older workers accrue morerm-specic skills due to longer tenure. Thehighly educated have lower turnover andbenet the most rom on-the-job training,as education and training are oten comple-

mentary.3

Firm-specic skills become largely ob-solete when workers join a new company.Even more-widely applicable skills erodesignicantly i workers are long-term unem-ployed. Although much o the earnings lostdue to joblessness can be recouped ollow-ing reemployment, longer duration unem-ployment can produce a persistent incomedrag. Research indicates an immediate 30to 40 percent earnings decline that is onlypartially recouped with a new job. Ater sixyears back on the job, workers still conront

a 10 to 15 percent earnings reduction.4With one in ve jobs held by people

over age 55, up rom one in seven 30 yearsago, the baby boom, post-World War IIdemographic bulge is particularly at risk oearnings losses. Younger workers, by com-parison, are likely to leave the workorce,returning to school or additional training.However, they may also suer a long-termearnings loss. One study ound that collegegraduates entering the workorce duringa recession, and thus more likely acing

Chart 3Underutilized Labor Force: Texas vs. U.S.(Annual average 2010)

U.S.

Texas

U.S. discouraged workers

Texas discouraged workers

0 2 4 6 8 10 12

Unemployed

Underemployed

Marginally attached

Percent

NOTE: Percent marginally attached is inclusive o discouraged workers.


The negative association

between underemployment

and the subsequent years

earnings is more pronouncedor workers with a college

degree than or those who

dropped out o high school.



underemployment, earned 2.5 percentless than they otherwise would 15 yearsater starting on the job. This suggests thatworkers who graduate in bad economiesare unable to ully shit into better jobs aterthe economy picks up.5 Oten, the new-est graduates with the latest skills obtainemployment ahead o those who nishedschool earlier and havent ound ull-timework.

Choosing UnderemploymentWith underemployment and unemploy-

ment potentially costly, policymakers mightwant to get workers back to work as soonas possible. However, while unemploymentcompensation helps maintain income, italso discourages a return to work.6 Last De-cember, President Obama signed a reautho-rization o ederal unemployment extensionbenets, providing 13 additional months,to a maximum o 99 weeks o payments. AChicago Fed study suggests that extended

jobless benets added close to 1 percentagepoint to the national unemployment rate.7While the U.S. relied primarily on the s-cal stimulus and jobless benets to protectworkers during the recession, other coun-tries ollowed dierent approaches.

One example is Germanys Kurzarbeitshort-time work program. Although manyactors may have shielded the German la-bor market during the recession, the short-time work plan is widely believed to haveplayed a role. It encourages rms to lower

their labor costs by reducing total hours in-stead o cutting jobs. So while the Germangross domestic product shrank 2 percentagepoints more than that o the U.S. rom peakto trough in the Great Recession, Germanysunemployment rate remained largely fat.

The plan, in eect, promotes underem-ployment over unemployment by spread-ing the downturns impact on hours andearnings across many workers rather than

a ew. Under the program, the governmentreplaces 60 to 67 percent o lost earningso the underemployed and reimburseshal o the rms public pension contribu-tion due to lost hours. By keeping workersemployed, the plan limits skill deteriora-tion during the downturn and helps rmsexpand quickly during the recovery. On theother hand, Kurzarbeit intereres with labormarket reallocation and may be inecientin the long run.8

Slack in the WorkorceThe number o people engaged in in-

voluntary part-time employment or who havesustained a reduction in the terms o employ-mentmandatory unpaid time o, demotion,reduced pay and benetsis characteristico the economic downturn rom which thecountry is slowly emerging. Longer-term im-plications include worker obsolescence thatmay slow economic growth as employerssearch or properly skilled individuals. More-over, such labor slack in the economy, as evi-denced by still relatively high unemployment

and underemployment rates regionally andnationally, helps account or a lingering eco-nomic malaise and pessimistic sentiment amidthe slow pace o recovery.

Kumar is a senior research economist and

advisor and Weiss is the economic writer/editor

in the Research Department at the Federal

Reserve Bank o Dallas.

Notes1 2010 is the last ull year or which data are available; unless

otherwise specifed, all analysis in this article is restricted to

2010.2 Okuns law states that or every 2 percent decline in GDP

relative to long-term trend, the unemployment rate should

increase by 1 percentage point. See Okuns Law and the

Unemployment Surprise o 2009, by Mary Daly and Bart

Hobijn, FRBSF Economic Letter, Federal Reserve Bank o San

Francisco, March 8, 2010.3 Education and Unemployment, by Jacob Mincer, National

Bureau o Economic Research, Working Paper no. 3838,

September 1991.4 Earnings Losses o Displaced Workers Revisited, by

Kenneth A. Couch and Dana W. Placzek, American Economic

Review, vol. 100, no. 1, 2010, pp. 57289.5 See The Long-Term Labor Market Consequences o

Graduating rom College in a Bad Economy, by Lisa B. Kahn

Labour Economics, vol. 17, no. 2, 2010, pp 30316.6 Unemployment Insurance and Job Search Decisions, by

Dale T. Mortensen, Industrial and Labor Relations Review,

vol. 30, no. 4, 1977, pp. 50517.7 How Did Unemployment Insurance Extensions Aect the

Unemployment Rate in 200810?, by Bhash Mazumder,

Chicago Fed Letter, Federal Reserve Bank o Chicago, April2011.8 For details, see Short-Time Work: The German Answer to

the Great Recession, by Karl Brenke, Ul Rinne and Klaus F.

Zimmermann, IZA Discussion Paper no. 5780, Institute or

the Study o Labor (IZA), June 2011.

Chart 4Underemployment Particularly Depresses Future Earnings o College Graduates

Log o weekly earnings

2554, white,

male, 2010

Percent underemployed in previous year

Young, black,

male, 2010

High school dropouts

2554, white,male, 2010

College graduates

Average for graduates

Average for h.s. dropouts

0 5 10 15 20 25 30 35 40 45 50 55 60 65

4.5

4.9

5.3

5.7

6.1

6.5

6.9

7.3

Young,Hispanic,female,2001

Young,white, female, 2001

NOTE: Each box represents a particular demographic group in a given year. Specic examples are labeled.

SOURCES: Basic monthly Current Population Survey (19982010), Bureau o Labor Statistics; authors calculations.


20/20

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Executive Vice President and Director of Rese

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Director of Research Publications

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Mexico Rides Global Recovery but Still Faces Hurdles(Continued rom page 13)

and public monopolies were replaced byprivate ones. As a result, consumers stillace expensive and outdated electricity,telecommunications and Internet services.9Enhancing competition and lowering mar-ket entry barriers would promote a higherquality and greater variety o consumer-related services.

Mexico joined the global recoverynot only via the external sector but alsothrough a healthy domestic market. Thecurrent U.S. slowdown is diminishinggrowth prospects. The central question isnot i Mexico can expand, but whether itcan do so ast enough to signicantly im-prove living standards. This can be accom-plished by building on structural reormsprincipally aimed at reducing inormality,promoting business competition and boost-ing public nances.

Caas is an associate economist at the Federal

Reserve Bank o Dallas, Coronado is a senior busi-

ness economist in the Banks El Paso Branch and

Gilmer is vice president in charge o the El Paso

Branch.

NotesThe authors thank Pia Orrenius, Ed Skelton and Eduardo

Saucedo or their comments.1 The Mexico GDP growth rate is calculated year over year.

Measured quarter over quarter, Mexico GDP growth slowed

to a 2.4 percent annual rate in frst quarter 2011 but bounced

back in the second quarter, growing at a 4.4 percent rate. Year

quarter 2011 rom 4.6 percent in the frst quarter.2 For more details behind the strong trade ties between both

nations and the recent trade recovery, see Trade Conerence

Explores U.S.Mexico Common Bonds, by Jesus Caas,

Roberto Coronado and Robert W. Gilmer, Federal Reserve

Bank o Dallas Southwest Economy, First Quarter, 2011.3 In 2010, Mexico was included in the World Government

Bond Index, which urther spurred capital inows.4 For more details on maquiladoras, see Maquiladora

Recovery: Lessons or the Future, by Jesus Caas, Roberto

Coronado and Robert W. Gilmer, Federal Reserve Bank o

Dallas Southwest Economy, no. 2, 2007, and Maquiladora

Industry: Past, Present and Future, by Jesus Caas and

Roberto Coronado, Federal Reserve Bank o Dallas Business

Frontier, no. 2, 2002.5 The Banco de Mxico report on the regional economy can be

ound at www.banxico.org.mx/publicaciones-y-discursos/

publicaciones/inormes-periodicos/reportes-sobre-las-

economias-regionales/reportes-economias-regionales.html.6 For more details, see comments by Banco de Mxicos

Governor Agustin Carstens in Mexicos Economic Reorms

Propel Postrecession Rebound, Federal Reserve Bank o

Dallas Southwest Economy, Second Quarter, 2011.7 See La Era de la Productividad, by Carmen Pags,

Washington, D.C.: Inter-American Development Bank, 2010.8 See Economic Survey o Mexico 2011, Organization or

Economic Cooperation and Development, May 2011,

www.oecd.org/document/34/0,3746,en_2649_34569_

47781730_1_1_1_1,00.htm.9 See No Growth Without Equity? Inequality, Interests, and

Competition in Mexico, Santiago Levy and Michael Walton,

ed., Washington, D.C.: World Bank, and Houndmills, U.K.,

and New York: Palgrave Macmillan.

Documents

FRB Dallas Southwest Economy 3Q 2011