Our Resilient RGV

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We got past the Recession and are growing strongThough the effects of the Great Recession of ‘07-’09 were significant and longlasting nationwide, they were minimal in our region, which has since recovered quite well. After examining the RGV in several measures and comparing it to reported state and national statistics, we have to agree with Alex Meade, CEO of the Mission Economic Development Corporation. “If you drive around you can see things going up. You have developers building and making investments, both commercial and residential,” he said. “It’s a good time to be in the Valley!”

Looking Back at the National Recession

According to the Center on Budget and Policy Priorities’ Chart Book: The Legacy of the Great Recession, the collapse began in December of 2007 and ended in June of 2009 was the worst the U.S. has seen since the Great Depression.

The economic situation at the time involved a housing market bubble caused by speculation and low interest rates that burst, leaving individuals with high mortgages that they couldn’t afford and banks with loans in default. According to a 2010 NBC News report, more than 1.2 million households were lost to the recession.

Although economic recovery started in mid-2009, many parts of the nation have seen slow growth that still hasn’t reached pre-recession levels. Among other factors, the CBPP lists high unemployment and low economic productivity as the legacy of the Great Recession.  

Nationwide, the job losses over 2007-09 were unprecedented.  Nearly 25 percent of the almost 8 million Americans who were unemployed remained so for an average of 28 weeks or longer.

The worst previous episode was in the early 1980s, when the long-term unemployment share peaked at around 3 percent. Today the Bureau of Labor Statistics reports the national unemployment rate at 5 percent and a record low long term unemployment rate of 1.19 percent (May of 2016).

Better in Texas

Looking at those factors statewide, Texas as a whole was stable throughout the recession. According to Dr. M.Ray Perryman, in his article, “This is Not the 1980s,” it is a good sign that our state economy is adding jobs in other industries besides oil, the price of which rises and drops over the years. “Technology, advanced industries and other emerging industries are part of the story. Stability and growth in cornerstone industries like higher education and health care is also a contributing factor.”

Texas also almost completely escaped the housing bubble that destroyed other states, thanks in part to conservative lending practices, low cost of living, and reliance on property taxes. According to a 2010 article by Slate, relaxed zoning codes and abundant land kept price appreciation and speculation down. “Unlike many of its neighbors, Texas has state laws that prohibit consumers from using home-equity lines of credit to increase borrowing to more than 80 percent of the value of their homes,” Slate reported.  

Locally, it was not as bad

“We were almost immune,” said Meade in regard to the recession’s devastating effects on America’s housing market. We saw limited foreclosures as the result of conservative lending practices at local and regional banks. A Metrostudy 2014 survey revealed a humble, yet consistent growth in the local real estate market.

“Inventories are improving, prices are rising, and there is a good pocket of construction in a small group of subdivisions,” the survey reports. “There are still issues with excess housing inventories in both the new home and resale markets, as well as foreclosure inventory. Complete recovery doesn’t occur until inventories are brought back in line with demand, and that still remains somewhere down the line.”

Before the recession, the average sales price of a new single-family home increased by an average of more than 8 percent annually, with average sales price of a single-family home in the Mcallen-Edinburg-Mission area sitting at $120,500 from 2006 through 2007.

In 2016, average mortgage size in the area increased 20.5 percent from a year earlier to $182,384. In the Brownsville-Harlingen metropolitan area, the average price of new homes was $140,895 in 2016.

Growing With No Sign of Slowing

Home sales are only one indication of the economy; construction and the growth that comes with it is another. In 2007, amid a recession, the Valley saw a record-setting $1.48 billion worth of construction permits filed in Valley cities; Harlingen, McAllen, Edinburg, Brownsville, and Mission all broke the $100 million mark in permitted construction activity. This activity has not slowed over the years; Valley cities recorded $926.8 million in building permits in 2013. According to the Valley Business Report, Harlingen and McAllen showed $134.9 million in commercial construction and $62.3 million in new home construction that year.  

Continuing the pattern, a City of Edinburg press release announced that construction and related building activities in Edinburg totaled almost $20 million during March 2016, bringing the total value of construction activities in the city to almost $65.2 million during the first quarter alone.  

However, Salvador Contreras, associate professor in the Department of Economics and Finance at the University of Texas Rio Grande Valley, says much of the growth in the RGV is mostly attributed to population growth. According to his findings, the population of Hidalgo County has grown at an average of 2.6 percent annually from 2000 to 2015 to the current high of 842,304.   

“Cameron County has had a growth of 1.5 percent over the same period of time,” he said, while the average annual growth of all MSAs in the United States is 0.5 percent. The economic benefits of population growth include a larger labor market, more revenue for local businesses as demand grows for products and services, and federal investment into densely populated regions. “All indications appear to suggest that over the next year or two the area will continue its current trajectory,” Contreras said.  

screen-shot-2016-11-04-at-3-16-02-pmMade in the RGV

Manufacturing is a staple of a free market economy, as it’s the basis for mass production and consumption. The contribution of manufacturing to the U.S. economy has almost doubled since the second quarter of 2009, from  $1.7 trillion to $2.17 trillion in 2015. In 2015, that was 12.1 percent of gross domestic product in the economy.

Texas alone accounted for more than 16 percent of U.S. goods exported in 2015, with more than $251 billion in goods exported. According to a 2010 article by Slate, manufactured goods like electronics, chemicals, and machinery account for a bigger chunk of Texas’ exports than petroleum does.

Since the introduction of NAFTA, the Valley has been a hotbed for manufacturing. The McAllen Foreign Trade Zone created more than 30 years ago was the first inland non-seaport trade zone in the United States. Today, the McAllen Foreign Trade Zone consists of over 775 acres, and offers full service logistics solutions to over 100 clients representing over 42 countries worldwide.

Companies are drawn to the McAllen Foreign Trade Zone because of favorable business conditions such as low taxes, affordable housing, and a young and increasingly skilled workforce. According to an article by the Rio Grande Guardian in 2016, McAllen has one of the youngest populations along the border. “The median age for McAllen is 28.4 years,” it cites, comparing it to Texas’s median age of almost 34, and 37 nationwide.

Because of the interaction with the border of Mexico, the success of the RGV’s manufacturing sectors depends on the value of the dollar and peso.

“If the peso stays where it is or about there, we should continue to see a lot of activity from manufacturing companies moving into the area,” said Keith Patridge, McAllen’s Economic Development Corporation’s president. “I think we’re going to continue to see a strong growth pattern here. It’s not going to be crazy growth but it will be a good steady growth period for the foreseeable future.”

Positioned for Recovery

The Valley was listed several times as being “recession-proof” for its quick recovery to pre-recession levels. “We definitely didn’t suffer as much as other parts of the country,” Patridge said. This could also be due in part to our location on the U.S.-Mexico border, as it has been estimated that cross-border commerce creates nearly 9,650 jobs and contributes about $767 million annually in total economic impact to the region.

“We benefitted from being so close to the border,” Meade said. “We had consumers who would come in from Mexico, so the downturn was something that didn’t impact us as much.”

With the many shopping plazas in McAllen and the construction of the outlet malls in Mercedes, the Rio Grande Valley is a shopping destination for international travelers. According to a 2012 report, 35 to 40 percent of retail sales in McAllen-Edinburg-Mission area were made by Mexican nationals, and 30 to 35 percent of Brownsville’s, accounting for around $4.5 billion per year in Texas border retail.

In 2014, the City of McAllen achieved over $7.1 billion in total retail sales. This represents 37.9 percent of all retail sales in Hidalgo County. Edinburg also saw an 8 percent growth in local retail economy in 2015 over the previous year.

We cannot forget to mention the low cost of living in Hidalgo County, which is approximately 25 percent lower than the U.S. average. According to the Council for Community and Economic Research, Hidalgo County compares favorably to other Texas regions in several cost of living factors like food, housing, utilities, and transportation. A low cost of living means individuals have more money to spend or invest, both of which are a boon to the economy.

Investment

The recession shook the financial markets, and unlike the housing market’s regional pockets, the stock market is the same everywhere.

“Whether you live in New York or the Valley doesn’t make a difference when you own stock in a company,” said Bill Martin, CERTIFIED FINANCIAL PLANNER™ Professional in the McAllen office of Raymond James & Associates, Inc. member NYSE/SIPC.

According to Investopedia.com, stocks fell 50 percent or more from their highs through March 2009 before rallying more than 50 percent once the crisis began to ease.

Martin explained that 10 years ago, you saw reasonable interest rates on certificates of deposit (CDs) or bonds.

“Significantly higher than they are today,” Martin said. “You could get a 5 percent CD — today those rates don’t exist. That same one-year CD is closer to 0.5 percent. That makes a big difference if that was part of the income you lived on.”

The traditional CD buyer may then be enticed to do things they aren’t comfortable with to make up for that lost income — buying longer term bonds to get the same interest rate, or buying dividend paying stocks or other income investments like real estate.

“I believe that contributes to the volatility of the stock market,” Martin said. “People who wouldn’t necessarily be in that type of investment are now subjected to volatility; when things start to get scary they’re more likely to sell and that further exacerbates the stock market’s movement.”

Risk and Payoff

“Risks are inherent with that type of business, but historically, it’s been hard to beat the return in the long run,” Martin said. “Prices change day-to-day, but they have outperformed most every other asset including real estate or bonds over history. It’s a good thing to own, particularly when you’re trying to manage your money.”

He says it is better when people are comfortable with the idea of risk and are taking appropriate risk for their age and stage in life.

“You just have to get comfortable with the idea that the investment is a sound one, and you bought it for the right reasons — knowing ahead of time that it’s going to be cyclical and being ok with that ride. They have to be able to say, ‘I will sit through those cycles.’ If they’re not … as soon as it goes through some cyclical downturn, they’re going to sell and lose money.”

Individuals who are not yet participating in the stock market at all are missing out on ownership of a business.  

“You can own the stocks individually, or you can spread out your risk over dozens, even hundreds of companies represent industries across the U.S.,” Martin said. While there are different ways to own businesses in the stock market, there are just as many ways to be taken advantage of, which is why he stresses the need to work with a reputable adviser.

“You need to work with someone who can provide referrals and has a history of working with people and their money. It doesn’t have to be me,” he said, “but it has to be somebody reputable. I don’t want people taken advantage of. If you understand the risk that’s one thing, but if someone is offering a high reward with no risk, there is probably something wrong.”

He explains that scammers will often promise a risk-free, unrealistic interest rate for current markets.

“There’s a reason it sounds too good to true. It probably is,” he said. “Don’t get caught chasing something that isn’t real.”

Looking forward

Several factors are currently making our economy fluid, like the price of the peso, the decreasing violence in Mexico, the upcoming election, and American debt. However, Contreras says that overall, economic activity in the U.S. has been relatively strong.

While there is no denying that students are being burdened by the debt they will likely carry for decades after graduation, Contreras says it is not clear that the just under $1.4 trillion student debt will lead to economic recession.

“A recession in the next year or two is highly unlikely,” he said. “While Americans in general carry much debt, there is no indication that this is unsustainable. For example, in the second quarter of 2016, consumer service on debt accounted for about 5.5 percent of disposable income. Assuming continued strength in the labor market, debt is manageable.”

According to the Chart Book, the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010 have been recovered, and more continue to be added.

It is expected that The Rio Grande Valley will remain a strong market with steady growth.

The Center of Border Economic Studies at UTRGV will host their Economic Forecasts Luncheon event in January 2017 where the center will present their economic forecasts for the region and discuss the sustainability of economic growth.

Sources:

https://www.perrymangroup.com/2016/09/26/this-is-not-the-1980s/

http://riograndeguardian.com/mcallen-edinburg-mission-now-5th-largest-msa-in-texas/ http://www.newgeography.com/content/001680-how-texas-avoided-great-recession

http://www.slate.com/articles/business/moneybox/2010/04/lone_star.html

http://www.cbpp.org/research/economy/chart-book-the-legacy-of-the-great-recession

http://www.metrostudy.com/38543-2/

https://www.dallasfed.org/assets/documents/research/events/2013/13bedes_coronado.pdf

http://www.builderonline.com/local-housing-data/mcallen-edinburg-mission-tx

http://www.investopedia.com/features/crashes/crashes9.asp

http://texasborderbusiness.com/harlingen-mcallen-edinburg-lead-valley-building-boom/

https://www.huduser.gov/portal/publications/pdf/cmar_mcallentx.pdf

https://www.huduser.gov/publications/pdf/mcallentx_comp_2014_new.pdf

http://www.nam.org/Newsroom/Top-20-Facts-About-Manufacturing/

https://www.huduser.gov/portal/publications/pdf/cmar_mcallentx.pdf

https://tx-hidalgocounty.civicplus.com/DocumentCenter/Home/View/4158

http://edinburgedc.com/edinburg-construction-grows-7-65-passes-65-1-million-first-quarter-2016

https://www.huduser.gov/publications/pdf/mcallentx_comp_2014_new.pdf

https://assets.recenter.tamu.edu/documents/mktresearch/RGV_NAI_ECONOMIC_REPORT_2015.pdf