U.S.-Mexico Economic Update: Where are we headed?

Roberto CoronadoAssistant Vice President in Charge and Sr. EconomistMay 17, 2013

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. Any secondary distribution of this

material is strictly prohibited. May be quoted with appropriate attribution to the author.

Today’s agenda

U.S. economic update

Mexico’s economic update

Trade between the U.S. and Mexico

Texas-Mexico border economy in transition

Future of manufacturing in Mexico

Concluding remarks

U.S. recovery continues to be modest

3.8

2.6

0.70.5 0.5

-0.5

2.1

1.5

1.0

0.1

-0.3-0.2

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Real GDP PCE Non-Residential ResidentialInvestment

Government Net Exports

Three prior recoveries This recovery (2009 Q3-2013 Q1)

-1.6

-1.1

0.3

-0.4-0.8

0.4

Average contribution to real GDP growth over 15 quarters

Source: HAVER Analytics

What do we mean by a sluggish recovery?

2.7

2.3

2.5

1.3

2.7

2.0

1.3

3.1

0.4

2.5

1.7

2.5

2.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009: H2 2010: H1 2010: H2 2011: H1 2011: H2 2012: Q1 2012: Q2 2012: Q3 2012: Q4 2013: Q1 2013:Q2 2013: H2 2014

Source: Bureau of Economic Analysis, Haver Analytics, Blue Chip Economic Indicators

% change, annualized

Forecast

2013: H1 Avg. 2.1

GDP growth: two steps forward, one step backward

-1000

-800

-600

-400

-200

0

200

400

600

03 04 05 06 07 08 09 10 11 12 13

April

165K 212K

Thousands (SA)

3-month MA

∆ in Payrolls

Source: Bureau of Labor Statistics

Payroll employment continues to improve

0

2

4

6

8

10

12

Source:Bureau of Labor Statistics

Percent

April 2013: 7.5

Unemployment rate is coming down

80

85

90

95

100

105

Source: Board of Governors, Federal Reserve System

Index: Jan 2007=100, S.A.

20%

6%

U.S. manufacturing recovery gaining momentum

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ISM Manufacturing Index

ISM Manufacturing: New Orders Index

SA, 50+ = Increasing

Source: Institute of Supply Management

Increasing

Decreasing

Is manufacturing picking up?

8

10

12

14

16

18

20

2006 2007 2008 2009 2010 2011 2012 2013

Million Units, SAAR

Source: Bureau of Economic Analysis/HAVER Analytics

Cash for ClunkersTsunami disrupts auto output

in Japan and the US

April=14.9

Vehicle sales continue to improve

What about the rest of the economy

Housing has bottomed down. Recovery gaining momentum.

Consumer spending has picked up. However, consumer sentiment still low.

Inflation in the comfort zone.

The big elephant in the room: Uncertainty

Mexico’s recovery has moderated

5.2

4.23.6

2.5

4.8

-6.2

5.5

7.2

5.0

3.6

6.0

-0.9

0.1

1.4

4.0

3.2

5.1

3.2

1.2

-6.0

5.3

3.9 3.9

-8

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

GDP growth, Percent

Source: Instituto Nacional de Estadistica Geografia e Informatica.

Mexico’s economy is moderating

103

108

113

118

123

128

133

138

143

2007 2008 2009 2010 2011 2012 2013

IGAE Total

IndustrialProduction

Services

Source: INEGI.

Index, 2003=100, S.A.

Expansion is broad-based

What is driving the strong recovery?

1. External sector– Mexico tapped into the strong growth of emerging

economies, around 20% of its exports go to EM– U.S exports have also grown, specially autos

2. Internal sector– Formal employment posted strong gains– Healthy banking system– Jobs + Lending = Strong consumption

3. Capital flows– FDI bouncing back after the “Great recession”– Portfolio investment taking the lead

Non-U.S. Mexico’s exports in the lead

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Banco de Mexico

Exports_US

Exports

Exports_ROW

Index Jan 2000= 100, real, s.a.

79%

21%

Exports U.S. Exports ROW

What is driving the strong recovery?

1. External sector– Mexico tapped into the strong growth of emerging

economies, around 20% of its exports go to EM– U.S exports have also grown, specially autos

2. Internal sector– Formal employment posted strong gains– Healthy banking system– Jobs + Lending = Strong consumption

3. Capital flows– FDI bouncing back after the “Great recession”– Portfolio investment taking the lead

Growth in Mexico’s formal employment

-15

-10

-5

0

5

10

2007 2008 2009 2010 2011 2012 2013

Total Employment, S.A, Annualized Percentage

Source: STPS

40

60

80

100

120

140

160

180

200

2005 2006 2007 2008 2009 2010 2011 2012 2013

Consumption

Mortgage

Commercial

Total Private Sector

Real, Index 2007=100

Source: Banco de Mexico

Lending has returned to pre-crisis levels

90

100

110

120

130

140

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Instituto Nacional de Estadística Geografía e Informática

(Index, January 2000=100, real,s.a.)Retail sales

What is driving the strong recovery?

1. External sector– Mexico tapped into the strong growth of emerging

economies, around 20% of its exports go to EM– U.S exports have also grown, specially autos

2. Internal sector– Formal employment posted strong gains– Healthy banking system– Jobs + Lending = Strong consumption

3. Capital flows– FDI bouncing back after the “Great recession”– Portfolio investment taking the lead

-20

-10

0

10

20

30

40

50

60

70

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Foreign Direct Investment Foreign Portfolio Investment

Source: Banco de México/HAVER Analytics

Billions

Capital inflows making a strong comeback: portfolio investment

taking the lead

Outlook for the Mexican economy

2013 GDP Forecast (%)

2014 GDP Forecast (%)

Banxico (4/13) 3.4 3.9

Banamex (3/13) 3.6 3.8

Bancomer (5/13) 3.1 3.1

IMF (4/13) 3.4 3.4

Blue Chip (5/13) 3.4 4.1

UTEP BRMP (Q1/13)

3.5 3.9

Trade is the main catalyst for U.S.-Mexico economic integration

40

50

60

70

80

90

100

110

120

130

140

1992 1996 2000 2004 2008 2012

Index, 2005=1003MMA

Source: CBP Netherlands Bureau for Economic Policy Analysis

Pre-crisis peak

Last observationFeb. 2013

Title in here

World trade now exceeds pre-crisis peak…

3.6

3.8

4

4.2

4.4

4.6

4.8

5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Last observation Feb. 2013

Pre-crisis peak April 2008

Log Index, 2005=100

26% Below 1992 - 2007

trend

Source: CBP Netherlands Bureau for Economic Policy Analysis

Title in here

…but still below 1992-2007 trend

U.S.-Mexico trade

Source: Census Bureau/Haver Analytics

0

50

100

150

200

250

300

350

400

4501

974

197

5

197

6

197

7

197

8

197

9

198

0

198

1

198

2

198

3

198

4

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Bill

ions

of

Dol

lars

, Rea

l, SA

, 3m

-m-a

U.S.-Mexico trade

0

50

100

150

200

250

300

350

400

450

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Bill

ions

of D

olla

rs, R

eal,

SA, 3

m-m

-a

3.16% above trend

Source: Census Bureau/Haver Analytics

U.S.-Mexico trade

• Mexico is the third most important trading partner for the U.S.

• In 2012, Total trade with Canada almost reached $616 billion, with China $536 and with Mexico $493

• For Arizona, California, New Mexico and Texas, Mexico is a key trading partner:

• Arizona ---- $6.3 billion (34%)• California ---- $26.3 billion (16%)• New Mexico ---- $0.6 billion (21%)• Texas ---- $94.8 billion (36%)

How are the U.S.—Mexican industrial sectors linked?

• 18% of U.S. exports go to Mexico• 72% of U.S. exports to Mexico are

industrial products

• 8% of U.S. imports are from Mexico

• 90% of these imports are industrial

• Maquiladoras are a major vehicle for this cross-border movement of industrial goods

U.S.-Mexico total trade by sector

Sector1996

(Billions)2012

(Billions) % change

Petroleum 7.9 60.6 667%

Road Vehicles 19.6 73.4 274%

Electrical Machinery 20.9 50.0 139%

Telecommunications 9.5 38.8 308%

Office /Automatic Data Processing

5.6 30.4 443%

General Industrial Machinery

4.7 24.2 415%

Power-Generated Machinery

4.8 18.2 279%

Total Trade U.S.-Mexico 131.1 494.0 277%Source: U.S. Census Bureau

Trade by port of entry

Source: U.S. Department of Commerce Bureau of the Census, Foreign Trade Division

Texas ports 2012 $ Billions

2012 % of Texas total

Brownsville-Cameron 15.39 3.73%

Del Rio 4.14 1.00%

Eagle Pass 21.65 5.25%

Laredo 168.79 40.91%

Hidalgo/Pharr 26.84 6.51%

Rio Grande City 0.27 0.07%

Progreso 0.38 0.09%

Roma 0.05 0.01%

El Paso 66.85 16.20%

Presidio 0.50 0.12%

Texas 412.57

Texas–Mexico border synchronization

Laredo-Nuevo Laredo

El Paso-Ciudad Juarez

-0.1

-0.05

0

0.05

0.1

0.15

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Maq

uila

dora

Val

ue A

dded

U.S

. bor

der C

ity

Empl

oym

ent Laredo-Nuevo Laredo

Maquiladora Value Added U.S. Border City Employment

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Maq

uila

do

ra V

alu

e A

dd

ed

U.S

. bo

rde

r C

ity

Emp

loym

en

t El Paso-Ciudad Juarez

Maquiladora Value Added U.S. Border City Employment

Mc Allen-Reynosa

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Maq

uila

dora

Val

ue A

dded

U.S

. bor

der C

ity

Empl

oym

ent Mc Allen-Reynosa

Maquiladora Value Added U.S. Border City Employment

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Maq

uila

dora

Val

ue A

dded

U.S

. bor

der C

ity

Empl

oym

ent Brownsville-Matamoros

Maquiladora Value Added U.S. Border City Employment

Brownsville-Matamoros

Notes: Charts show nonfarm employment annual growth rates (left-axis) for U.S. border cities and maquiladora value-added annual growth rates (right-axis) for Mexican border cities, for the period 2000-2006.Sources: U.S. Bureau of Labor Statistics and Instituto Nacional de Estadistica Geografia e Informatica.

Piedras Negras- Eagle Pass

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.419

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Maq

uila

dora

Val

ue A

dded

U.S

. bor

der C

ity

Empl

oym

ent

Eagle Pass-Piedras Negras

Maquiladora Value Added U.S. Border City EmploymentNotes: Charts show nonfarm employment annual growth rates (left-axis) for U.S. border cities and maquiladora value-added annual growth rates (right-axis) for Mexican border cities, for the period 2000-2006.Sources: U.S. Bureau of Labor Statistics and Instituto Nacional de Estadistica Geografia e Informatica.

Maquiladoras impact by border city

• 10 percent increase in maquiladora output leads to an increase in the adjacent U.S. city as follows:

− 2.8 percent increase in total employment in El Paso

− 4.6 percent increase in total employment in Laredo

− 2.2 percent increase in total employment in Brownsville

− 6.6 percent increase in total employment in McAllen

− 3.9 percent increase in total employment in Eagle Pass

Title in here

Maquiladoras are quite important for Texas border

citiesEstimation method: IV El Paso Del Rio

Eagle Pass Laredo McAllen Brownsville

City Level 2.77* -1.23 3.90* 4.62 6.58* 2.21

Construction 0.20 -1.47 0.99 3.19 4.04* 1.29*

Manufacturing -1.28 -6.85 1.63 1.02 1.64 0.66

Transportation 5.30* 2.16 11.4* 7.21* 6.63* 4.6*

Wholesale 0.43 33.92 30.88 1.96 4.01* 0.84

Retail 1.31 -6.46 4.06* 0.66 3.21* 1.34*

FIRE 2.12* -4.34 3.99* 8.23* 4.63* 0.64

Services 1.84* n.a. n.a. 5.93* 7.38* 3.89*Notes: This table shows elasticity estimates. That is the table shows the percentage increase in local employment from a 10 percent increase in maquiladora production for each Texas Border Cities. * indicates significant at the 10% level. Source: J. Cañas, R. Coronado, R. Gilmer, E. Saucedo (2011) “The Impact of Maquiladoras on U.S. Border Cities”, Federal Reserve Bank of Dallas, working paper.

Texas-Mexico border economy in transition

Border economy in transition

• Employment migrating from manufacturing to services

• Per capita income closing gap with national levels

1990Mfg.

2011Mfg.

1990Services

2011Services

El Paso 20% 6% 73% 85%

Laredo 4% 1% 86% 91%

McAllen 14% 3% 74% 87%

Brownsville 16% 4% 76% 88%

Eagle Pass 17% 4% 72% 81%

Source: Bureau of Economic Analysis

Per capita income in El Paso and other Texas border cities, 1969-2010

(As a share of the US level)

30

35

40

45

50

55

60

65

70

75

30

35

40

45

50

55

60

65

70

75

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Bureau of Economic Analysis

%

Brownsville-Harlingen El Paso Eagle Pass Laredo McAllen- Edinburg- Mission

Percentage-point contribution to border-city earnings growth by selected industries, 2001-2010

Brownsville El Paso Laredo McAllen US

Manufacturing -6.9 -10.3 -0.8 -4.4 -7.3

Health Care 8.8 2.7 5.3 11.2 4.6

Retail -0.3 -1.2 -1.2 0.2 -1.6

Cross-Border Trade 6.5 7.8 1.5 5.6 5.2

Transportation 0.1 0.3 -2.5 0.7 -0.2

Services 6.0 6.5 2.7 4.8 5.1

Federal Civilian 0.4 1.1 1.3 0.1 0.3

Total Earnings 5.0 4.4 4.9 6.8 2.7Source: Crossroads Issue 2: July 2012; Federal Reserve Bank of Dallas, El Paso Branch

Future of manufacturing in Mexico

Future of Mexico’s manufacturing

• Mexico has undergone a severe transformation in manufacturing and exports since 2001.

• Today, Mexico is a key player in global manufacturing.

• However, there are plenty of challenges ahead.

China’s manufacturing wages are growing faster than

Mexico, but…

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mexico

China

Eastern Europe

Index, 2002=100

Source: Bureau of Labor Statistics and author’s calculations

Mexico’s manufacturing compensation still higher than

China

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mexico

China

Eastern Europe

$1.7

$9.3

$6.2

$/hour

Source: Bureau of Labor Statistics and author’s calculations

But manufacturing productivity is growing in Mexico

90

95

100

105

110

115

120

125

2007 2008 2009 2010 2011 2012

Index, January 2007=100SA, real

Source: INEGI and author’s calculations

Mexico auto exports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mil

lion

s

Source: Asociación Mexicana de la Industria Automotriz, A.C.

Millions of units, SAAR, 3-mo moving avg.

68.1%0.9%

16.5%

0.8%6.4%

1.1% 6.3%North AmericaCentral America and CarribeanSouth AmericaAsiaEuropeAfricaNot Specified

Mexico gains ground in North America light vehicle production

Source: Thomas H. Klier, Federal Reserve Bank of Chicago, with data from Ward’s Automotive Group.

Mexico becomes largest source country of U.S. motor vehicle parts

Source: Thomas H. Klier, Federal Reserve Bank of Chicago, with data from International Trade Commission.

Mexico

Mexico is closing the gap with China

0%

5%

10%

15%

20%

25%

Mexico

Canada

China

Source: U.S. Census Bureau 2013* Year to date

9

10

11

12

13

14

15

16

**

Source: Banco de Mexico

May 13: $12.14

2013: $12.3

2014: $12.27

Exchange rate

Exchange rate forecast

2013 Forecast

2014 Forecast

Banxico (4/13) 12.19 12.19

Scotiabank (4/13) 12.44 12.51

Banamex (5/13) 12.12 11.99

Blue Chip (5/13) 12.30 12.27

UTEP BRMP (Q1/13)

12.56 12.75

Concluding remarks• The U.S. economy is coming out of the

worst recession in decades, slow recovery.

• The shape of Mexico’s recovery going forward depends on the U.S. industrial sector.

• Strong domestic market has fueled Mexico’s recovery.

• Mexico now plays a critical role in the North American auto sector.

• The U.S. auto sector is expected to continue to grow and this should be good news to the trade flows between the U.S. and Mexico.

U.S.-Mexico Economic Update: Where are we headed?

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. Any secondary distribution of this

material is strictly prohibited. May be quoted with appropriate attribution to the author.

Roberto Coronado

roberto.coronado@dal.frb.org

915.521.5235