Academic journal article Federal Reserve Bulletin , Vol. 79, No. 5
I am pleased to respond to your request to share my views on monetary policy and the state of the economy in the Eleventh Federal Reserve District. The economy of the Eleventh District, which includes Texas, southern New Mexico, and northern Louisiana, has fared somewhat better than the national average during the past three years.1 In part, we have done better because the economy was rebounding from the sharp contraction that took place after 1986. Measured by employment, our region managed to avoid recession but not sluggish recovery. After the U.S. recovery began in April 1991, District employment growth weakened, and unemployment began to rise. Our employment growth slowed below trend, and our unemployment rates increased to national levels, especially in areas vulnerable to defense cuts. Even with these weaknesses, however, employment in the three states has grown by 194,000 since the trough in the national economy.
OVERVIEW OF THE ELEVENTH DISTRICT ECONOMY
The relative strength of our economy derives, in part, from trade with Mexico. Exports from Texas to Mexico rose 16.5 percent in 1991 and jumped another 22 percent in 1992. Exports in 1992 amounted to $19 billion, which represented 4.7 percent of gross state product. District industries benefiting most from increased Mexican trade include chemicals, food and kindred products, transportation equipment, electric and electronic equipment, furniture and fixtures, and apparel.
Our border cities have shown the strongest growth, both in terms of manufacturing employment and in retail sales. Geographically, San Antonio and Austin are doing better than Houston and Dallas-Fort Worth. Fort Worth has been hardest hit by defense cuts, while Houston has felt the brunt of energy cutbacks.
Restructuring away from energy continues to make our economic profile more like the nation's, but that restructuring, like similar adjustments across the nation, continues to exact a human toll. Within our District, the performance of New Mexico is similar to that of Texas, while that of Louisiana has been somewhat weaker.
Except for commercial real estate, construction has been a recent source of strength and jobs in our region. Residential permits last year were the highest since 1986, the year of the oil bust. Office vacancy rates, however, have not recovered much. One lesson from our District is that the overhang of commercial real estate lasts a long time.
The financial condition of our banks has improved over the past two years, and bank lending has stabilized for the first time since 1985. Nonetheless, the credit crunch has been very real in the Southwest. While it has eased somewhat during the past year, the credit crunch continues to impede job growth in small-and medium-sized businesses that rely on banks for credit.
A Stronger Growth Trend
With most sectors of the District's economy outperforming their national counterparts, a stronger long-term growth trend may be the principal factor contributing to employment growing faster in the District than in the nation during the recovery. Since 1970, the trend rate of growth in District employment has been 2.9 percent annually, while the trend rate of growth in U.S. employment has been 2.1 percent annually. Since the trough in March 1991, employment gains in both the District and the United States have been about equally below their long-term trends. In the District, employment has grown at a 0.9 percent annual rate since March 1991, while U.S. employment has grown at a 0.3 percent annual rate.
Several factors contribute to the District's stronger growth trend. First, the state and local fiscal policies in the District have struck a favorable balance between the provision of government services and the taxes required to finance them. Second, political and social factors in the District states are generally favorable to economic growth. Third, the populations of New Mexico and Texas are younger than the U. …