W elcom e . Paulo Goes Dean, Eller College of Managem ent A Look - - PowerPoint PPT Presentation

2018 Breakfast with the Economists ebr.eller.arizona.edu 6/6/2018 Economic and Business Research Center Eller College of Management University of Arizona 1

W elcom e.

Paulo Goes

Dean, Eller College of Managem ent

Our region

Outlook for Tucson

George Ham m ond, Ph.D.

Director, Econom ic and Business Research Center

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A Look Ahead

UNIVERSITY OF ARIZONA / ELLER COLLEGE OF MANAGEMENT

►Revised Arizona job data show stronger growth

►Particularly for Tucson

►Federal procurement spending in Arizona is on the rise

►Which matters for defense/aerospace/Tucson

►Arizona exports to Mexico have declined significantly

►But there are signs of stabilization

►Interest rates and gas prices are moving up

►Increasing risks to the expansion

►Continued growth is on the horizon, but keep an eye on

risks

2018 Breakfast with the Economists ebr.eller.arizona.edu 6/6/2018 Economic and Business Research Center Eller College of Management University of Arizona 2

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Tucson MSA Jobs: A Look Back

UNIVERSITY OF ARIZONA / ELLER COLLEGE OF MANAGEMENT

366 368 370 372 374 376 378 380 II III IV I II III IV I II III IV 2015 2016 2017 BLS EBRC Benchmark Thousands

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1.7 2.2 0.1 0.7 0.6 1.4 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Arizona Phoenix MSA Tucson MSA Percent Preliminary Revision

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Arizona Job Growth

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Before And After Revision, 2016 To 2017

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‐8 ‐6 ‐4 ‐2 2 4 6 8 00 02 04 06 08 10 12 14 16 Arizona Phoenix MSA Tucson MSA U.S. Percent

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Arizona Job Growth

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Over The Year

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2 4 6 8 10 12 14 16 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 $Billions Department of Defense Non DOD

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Federal Procurement Spending

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In Arizona

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Arizona And U.S. Real House Prices

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Federal Housing Finance Agency

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80 100 120 140 160 180 200 00 02 04 06 08 10 12 14 16 18 U.S. Arizona Phoenix MSA Tucson MSA 2000Q1=100

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Tucson Ranks High On Affordability

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Single-Family Housing Affordability

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Housing Affordability Is Declining

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But Still Much Higher Than During The Boom

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Housing Cost Burden Varies By Income

Housing Affordability: Low Income Residents Struggle

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2018 Breakfast with the Economists ebr.eller.arizona.edu 6/6/2018 Economic and Business Research Center Eller College of Management University of Arizona 4

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Arizona And U.S. Wages Per Job

Smoothed, Over-The-Year Growth Rates

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UNIVERSITY OF ARIZONA / ELLER COLLEGE OF MANAGEMENT

1 2 3 4 5 6 04 06 08 10 12 14 16 18 Arizona U.S. Percent

0% 5% 10% 15% 20% 25% 30% 35% 40% Mexico Canada China United Kingdom Germany Japan United Arab Emirates Thailand Singapore Taiwan France Hong Kong Brazil Netherlands Korea, South Malaysia Saudi Arabia Israel Switzerland Australia Ireland Belgium Italy India Chile Turkey Philippines Russia Czech Republic Vietnam Spain New Zealand Indonesia Malta Qatar South Africa Poland Sweden Costa Rica Denmark Norway Austria Kuwait Bangladesh Peru Colombia Afghanistan Panama Argentina Pakistan

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Arizona Merchandise Exports

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Country Share Of Arizona Exports In 2017

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36.3% 9.9%

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Arizona-Mexico Tourism Cost Index

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Tucson MSA: Lodging, Gasoline, Food Away From Home

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80 120 160 200 240 280 06 07 08 09 10 11 12 13 14 15 16 17 18 2006:1 = 100 Peso Denominated Dollar Denominated

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 100 200 300 400 500 600 700 800 900 04 06 08 10 12 14 16 18 $ Millions Arizona BPOE Personal Vehicle Passenger and Pedestrian Crossings (Left Axis) Exports to Mexico (Right Axis) Millions

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Arizona Exports To Mexico

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Merchandise Exports And Legal Northbound Border Crossings

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Tucson MSA Economy Scorecard

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Tucson MSA And U.S. Job Growth

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Annual Growth Rates

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‐6 ‐4 ‐2 2 4 6 00 05 10 15 20 25 Tucson U.S. Percent ‐12 ‐8 ‐4 4 8 12 2000 2005 2010 2015 2020 2025 Federal‐Defense Federal‐Nondefense Percent

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U.S. Real Federal Spending Growth

Excluding Transfers, IHS Markit, May 2018

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UNIVERSITY OF ARIZONA / ELLER COLLEGE OF MANAGEMENT

4 8 12 16 20 80 85 90 95 00 05 10 15 20 25 Percent Federal Funds 10 Year Treas. 30 Year Conv. Mtg.

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U.S. Interest Rates

IHS Markit, May 2018

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2018 Breakfast with the Economists ebr.eller.arizona.edu 6/6/2018 Economic and Business Research Center Eller College of Management University of Arizona 6

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Tucson MSA Income And Sales Growth

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Annual Growth Rates

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‐12 ‐8 ‐4 4 8 12 00 05 10 15 20 25

Retail Sales Personal Income

Percent ‐6 ‐4 ‐2 2 4 6 2000 2005 2010 2015 2020 2025 Optimistic Pessimistic Percent

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Tucson MSA Job Growth

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Baseline And Alternative Scenarios

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Explore data for border economies.

Arizona-Mexico Econom ic I ndicators azm ex.eller.arizona.edu

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Visit the aw ard-w inning

Arizona’s Econom y

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Learn about Southern Arizona.

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Econom ic and Business Research Center

National, State and Local Recognition

Our w orld

U.S.-Mexico Trade and NAFTA

Jesus Cañas

Senior Business Econom ist, Federal Reserve Bank of Dallas

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The views expressed in this presentation are strictly those of the author.

Benefits and Challenges

• f Trade under NAFTA

Breakfast with the Economists, 2018 University of Arizona June 2018

Jesus Cañas and Pia Orrenius Federal Reserve Bank of Dallas

A Historic Agreement -1-

• Canada and U.S. already had an agreement
• Adding Mexico broke the mold
• NAFTA’s stated objectives
• Eliminate barriers to trade & investment
• Remove tariffs and non-tariff barriers
• Facilitate cross border movement
• Resolve disputes

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Average tariffs fell most in Mexico following NAFTA

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SOURCE: Executive Office of the President, Study on the Operation and Effects of the North American Free Trade Agreement, July 1997, p. 7.

10.0 2.9 2.1 0.7 2 4 6 8 10 12 1993 1996 Mexican Tariffs on Imports from the United States U.S. Tariffs on Imports from Mexico Percent

A Historic Agreement -2-

• U.S. fears: Massive job losses, falling wages

“There will be a giant sucking sound going south”

• Ross Perot; October 15, 1992
• Fears unrealized, but so were aspirations
• Elusive Mexican economic development

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U.S. trade with NAFTA partners more than doubled since 1993

1993 2016 Exports Billions of Dollars % Change Canada 166.9 266.8 59.9 Mexico 69.1 231.0 234.3 Imports Canada 184.8 278.1 50.5 Mexico 66.3 294.2 343.7 Total Canada 351.7 544.9 54.9 Mexico 135.4 525.2 287.9

NOTE: Data is in billions of 2016 U.S. dollars. SOURCE: U.S. Census Bureau.

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Foreign direct investment higher after NAFTA

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1.6 0.3 8.4 1.5 1 2 3 4 5 6 7 8 9 US to Mexico Mexico to US Billions, real 2016 $ Average Pre-NAFTA Average NAFTA

NOTES: Pre‐NAFTA U.S. to Mexico represents years 1982‐1993; Pre‐NAFTA Mexico to U.S. represents years 1987‐1993. Post‐NAFTA represents years 1994‐2015. SOURCE: Bureau of Economic Analysis.

Annual average pre-NAFTA Annual average post-NAFTA

Aggregate effects of NAFTA tariff reductions

Country Volume of Trade Terms of Trade Real Wages Mexico ++

• ++

Canada +

• +

United States + + +

SOURCE: Lorenzo Caliendo and Fernando Parro, “Estimates of the Trade and Welfare Effects of NAFTA,” NBER working paper No. 18508, 2012.

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Aggregate gains mask winners, losers

• Recent research identifies losers from trade
• Manufacturing workers, whose industries have been most

affected by Mexican imports—including along the border— experienced substantially lower wage growth than their counterparts in other industries

• Limitations on the mobility of workers both geographically

and across industries appear to be very important

SOURCE: “Looking for Local Labor Market Effects of NAFTA,” by John McLaren and Hakobyan Shushanik, Review of Economics and Statistics, vol. 98, no. 4, October 2016.

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‐20 ‐15 ‐10 ‐5 5 10 15 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Mexico U.S.

U.S. and Mexico business cycle synchronicity grows post-NAFTA

Corr: 0.78 Corr: 0.13 Percent, Y/Y

NOTE: Monthly changes in manufacturing component of industrial production. SOURCES: INEGI; Federal Reserve Board.

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40 25 32 4 5 10 15 20 25 30 35 40 45 Mexico Canada Weighted Average (Mex-Can) China Percent

NOTE: Data is from 2004. SOURCE: Robert Koopman, William Powers, Zhi Wang, and Shang-Jin Wei, “Give Credit Where Credit is Due,” NBER Working Paper No. 16426, 2011.

Intra-industry trade high within NAFTA: U.S. content highest in imports from Mexico, Canada

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U.S. Exports Highly Correlated with Intermediate Imports from Mexico

200 400 600 800 1,000 1,200 1,400 1,600 1,800 50 100 150 200 250 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Consumer goods imports from Mexico Intermediate goods imports from Mexico U.S. total exports Billions of dollars SOURCES: Bureau of Economic Analysis and Haver Analytics. Billions of dollars

Cross-border manufacturing has been able to mitigate some of the impact of economic shocks

• China’s entry to the World Trade Organization in 2002
• Great Recession

SOURCE: “Offshoring and Volatility: Evidence from Mexico’s Maquiladora Industry,” by Paul R. Bergin, Robert C. Feenstra, and Gordon H. Hanson, American Economic Review, vol. 99, no. 4, 2009, pp. 1664–71.

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U.S.–Mexico integrated processes help reduce volatility in U.S. manufacturing

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• 30
• 20
• 10

10 20 30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percent, Y/Y U.S. manufacturing employment China enters WTO Mexico maquiladora employment Variance = 58.6 Variance = 12.7

NOTES: Mexico's employment combines maquiladora and IMMEX. Shading is for manufacturing recession and the great recession. SOURCES: Bureau of Labor Statistics and INEGI.

Texas Border Cities: On the Front Lines of Trade

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Texas exports grow faster in post-NAFTA period

100 200 300 400 500 600 700 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

SOURCES: WISERTrade; Census Bureau.

Index, 1988 = 100; real values Texas U.S. without Texas Pre-NAFTA Post-NAFTA

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Texas exports to Mexico quite diverse

Computers and electronics, 26% Transportation equipment, 12% Petroleum & coal products, 11% Chemicals, 10%

Electrical equipment, 8% Other, 7% Machinery, ex. electrical, 6% Plastics & rubber products, 4% Primary metal mfg., 4% Fabricated metal products, 4% Food & kindred products, 3% Oil & gas, 3% Misc. manufactured goods, 2%

NOTES: Data from 2015. "Other" includes all categories under 2 percent. SOURCE: U.S. Trade Database, Census Bureau.

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Texas becomes top exporter in 2002

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50 100 150 200 250 300 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Billions of 2016$

SOURCES: WISERTRADE; Census Bureau; BLS.

Texas California Washington New York Illinois Michigan

Costs of opening up to trade

• 50,000 Texas jobs lost due to NAFTA, according to BLS
• More than 45 percent of Texas job losses were

concentrated along the Texas–Mexico border

• El Paso textile and apparel industry
• Trade Adjustment Assistance (TAA)
• Low educational levels and limited English proficiency
• Levi-Strauss (3,369 displaced workers)

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Foreign firms’ hiring more than offsets jobs lost Displaced workers concentrated along the border

47 Dallas (10,000) El Paso (19,000) Austin (3,000) Brownsville (3,000) San Antonio (2,000) Houston (1,000) McAllen (1,000) Dallas (134,000) El Paso (19,000) Austin (29,000) Brownsville (4,000) San Antonio (22,000) Houston (178,000) McAllen (8,000)

Title in here

Maquiladora activity boosts employment in Texas border cities

Estimation method: IV El Paso Laredo McAllen Brownsville TOTAL 2.77* 4.62 6.58* 2.21 Construction 0.20 3.19 4.04* 1.29* Manufacturing

• 1.28

1.02 1.64 0.66 Transportation 5.30* 7.21* 6.63* 4.6* Wholesale 0.43 1.96 4.01* 0.84 Retail 1.31 0.66 3.21* 1.34* FIRE 2.12* 8.23* 4.63* 0.64 Services 1.84* 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.

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Unemployment rates declined along the border after NAFTA

13.3 10.8 14.0 18.6 9.4 8.2 7.5 11.6 2 4 6 8 10 12 14 16 18 20 Brownsville El Paso Laredo McAllen 1980-1993 1994-2016 Percent

SOURCE: Bureau of Labor Statistics.

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Texas border cities narrowing the income gap with nation

(income as a share of U.S. total)

64.6 49.3 48.1 51.2 67.8 61.9 51.1 55.8 40 45 50 55 60 65 70 75 El Paso Laredo McAllen Brownsville 1990 2015 Percent

SOURCE: Bureau of Economic Analysis.

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What’s left to be done

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Still unequal trading partners…

SOURCE: OECD.

10,000 20,000 30,000 40,000 50,000 60,000 Canada Mexico U.S. 1994 2015 GDP per capita 2005 U.S. $, PPP adjusted

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$31,200 $42,300 $12,600 $16,400 $38,000 $51,600

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Northern Per capita income: $12,627 Informal labor: 43% of LF Poverty rate: 30% North-central Per capita income: $8,777 Informal labor: 57% of LF Poverty rate: 43% Central Per capita income: $10,415 Informal labor: 63% of LF Poverty rate: 49% Southern Per capita income: $6,597 Informal labor: 69% of LF Poverty rate: 57%

Inequality, poverty persist in Mexico

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• Mexico: manufacturing sector has boomed, but spillovers have

been limited

• Will reforms spread the gains from trade to rest of sectors and

reduce inequality?

• U.S. labor market effects
• Need for programs to identify and assist displaced workers
• Ability to adjust, diversify and grow
• Border cities overcame initial job losses, went on to thrive

Future calls for more NAFTA, not less

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