Download Economic Indicators Second Quarter FY 2009

Image: Job Benavides, Office of the VPPA, UTB/TSC
Economic Indicators
Second Quarter FY 2009
Prepared by:
Business Affairs Division
Rosemary Martinez, Linda Granja, and Tomas Guajardo
February 16, 2009
The University of Texas at Brownsville and Texas Southmost College
80 Fort Brown, Brownsville, Texas * (956) 882-8240 * www.utb.edu
Introduction
According to recent economic indicators, it appears that the national economy has continued to
deteriorate in spite of the inauguration of a new administration. Sales over the Christmas
holidays were dismal and first quarter 2009 sales are not meeting projections. Jobs are being lost
in record numbers, home foreclosures are still rising and the Federal Reserve lowered interest
rates to an unprecedented range of 0 – 0.25 percent, the lowest rate in 56 years.
Furthermore, universities across the country, including ours, are now experiencing record losses
in endowment values due to unfavorable market conditions. A decline in real estate values now
makes housing more affordable but still out of reach for individuals who have lost their jobs or
have had their work hours reduced.
Economic relief from Washington is on its way; however, experts predict the help may not be
enough to guarantee a full recovery in 2009. Current key indicators do not show any signs of
improvement. The Chronicle of Higher Education Today’s News reported on October 3, 2008
that there would be winners and losers in the economy in 2009. Recent reports seem to
contradict that statement as it now appears that there may not be any winners at all in the
economy of 2009.
For most of 2008, Texas had been resilient to the effects of the national economic downturn;
unfortunately, the downturn has finally made its presence in our state. As indicated in the
UTB/TSC First Quarter FY2009 Economic Indicators Report, the Texas economy was
countertrend to the national economy. Two main factors kept the Texas economy strong:
1. Oil and natural gas prices and
2. High exports due to a weak U.S. dollar.
However, current economic indicators show that the Texas and Rio Grande Valley economies
are beginning to feel the effects of the downturn. The Texas Comptroller now reports that the
State of Texas, although resilient to market conditions, is not immune. The Texas comptroller
issued the revenue estimates for the 2010 – 2011 biennium at a 10.5 percent decrease from the
previous biennium. Recently, the Center for Budget Policies and Priorities now includes the state
of Texas as one of the 45 states facing fiscal stresses in their Fiscal Year 2009 and/or Fiscal Year
2010 budgets.
45 States Face Budget Shortfalls
Note: Includes states with shortfalls in fiscal 2009 or projected shortfalls for fiscal 2010.
Source: Center for Budget Policies and Priorities
According to the World Economic Update issued by the International Monetary Fund (IMF) on
January 28, 2009, world growth is projected to fall to ½ percent in 2009, its lowest rate since
World War II. In 2008, world growth dropped from 5.2 percent in 2007 to 3.4 percent in 2008.
Financial market conditions have remained extremely difficult for a longer period despite wideranging policy measures to provide additional capital and reduce credit risks. According to the
IMF, economic recovery is expected in late 2009 and should rise about 1 percent in 2010.
There has been a significant decrease in both the Dow Jones and Standard & Poor’s (S&P) 500
Indexes over the last few months. On February 11, 2009, the Dow Jones closed at 7939.53 and
the S&P closed at 833.74, a decrease of 56 percent and 62 percent respectively, over the same
period last year.
Sources: Dow Jones – Yahoo Finance
Economic Indicators – 2nd Quarter, FY 2009
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At the local level, the same national and state indicators warrant close monitoring. However, as
a border economy the Rio Grande Valley is also directly impacted by our neighboring country’s
economic performance. The currency exchange rate between the Mexican Peso and the U.S.
Dollar is one of the most important indicators to review. The value of the peso has been very
resilient in recent years, benefiting our local economy.
Source: Invertia.com.mx
Over the last five years, the value of the peso has ranged between $10.5 and $11.5 pesos to one
U.S. dollar. However, during the past six months, the peso has dropped in value from
approximately $10.0 pesos to one dollar in August 2008 to $14.64 pesos to one dollar in January
2009; equating to a 46 percent loss in value.
The Federal Reserve Bank of Dallas estimates that the peso devaluation of 1995 which
approximated a 40 percent loss in value may have impacted approximately 1 percent of the state
total employment. Approximately, 75,000 jobs were lost over the three ensuing years. Certainly
the lessons learned from the past make us keenly aware of how market changes and losses in the
value of currencies can impact our local and state economies.
Changes in key economic indicators that continue to be of concern are:
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a decline in home sales and real estate values,
an increase in unemployment,
a decrease in interest rates, the lowest levels seen in years,
a decrease in the price of oil,
a slowdown in retail sales,
a decline in inflation with deflation now a risk.
Economic Indicators – 2nd Quarter, FY 2009
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Home Sales
The United States, building permits requests dropped 52.8 percent from 48,109 to 22,715 permits
when comparing November 2008 to November 2007. Most of that decline, 40.6 percent, has
occurred during the three months starting in September 2008 and ending in November 2008.
In Texas, building permit requests dropped 49 percent from 6,516 to 3,317 permits when
comparing November 2008 to November 2007. The decrease for the last three months, starting
in September 2008 and ending in November 2008 equaled 10 percent
Sources: Real Estate Center at Texas A&M
Building permits in the Brownsville/Harlingen metro area dropped 41.3 percent from 92 to 54
from when comparing November 2008 to November 2007. In the last three months, September
2008 through November 2008, the number of building permits issued in the
Brownsville/Harlingen area actually increased by 3.8 percent. Most of this increase is attributed
to the issuance of commercial building permits for university and local school district
construction projects. To a great extent, public entity construction contracts are stimulating the
local economy and slowing down the impact of our national economic crisis on local citizens.
Economic Indicators – 2nd Quarter, FY 2009
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Sources: Real Estate Center at Texas A&M
In the United States, home sales dropped 35.3 percent from 629,000 to 407,000 units, while
median prices dropped 11.5 percent from $249,100 to $220,400 from November 2007 to
November 2008. Since September 2008, the number of home sales dropped, by 12.4 percent and
median prices declined by $5,000.
In Texas, sales dropped 32.9 percent from 19,086 to 12,816 units, while median home prices
declined 5.3 percent from $144,700 to $137,100 from November 2007 to November 2008. Most
of the state decline has occurred since September 2008, with home sales down by 27.7 percent
and median prices down by $8,800.
In Brownsville, sales dropped 39.8 percent from 93 to 56 units, while median prices declined
25.9 percent from $118,800 to $88,000 from November 2007 to November 2008. Since
September 2008, home sales in Brownsville, declined by 21.1 percent while the median price
rose by $100. In Brownsville, it appears that the sharp decline in the price of real estate
occurred before the last quarter of 2008. Activity caused by lower real estate prices may be
supporting existing or increasing market values throughout the numerous neighborhoods in town.
Economic Indicators – 2nd Quarter, FY 2009
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Source: Real Estate Center at Texas A&M
In an effort to stabilize the market and reduce the number of foreclosures, the U.S. government
passed the Emergency Economic Stabilization Act of 2008, commonly referred as the bailout
bill, to help the United States financial system by purchasing troubled assets and providing loans
for struggling companies. Unfortunately, recent data indicates the market was not dramatically
impacted by the efforts of the government.
Home prices, as indicated above, continue to drop. Since foreclosures are closely tied to home
values and loan amounts that exceed the values, we can expect more foreclosures to occur.
According to RealtyTrac, a foreclosure listing website, U.S. foreclosure filings reached a record
302,000 in 2008, up 21 percent when compared to 2007.
Texas fared considerably better as its foreclosure rate grew by only 14 percent when compared
with 2007. Although there was a slight decrease in the number of foreclosures in the month of
November 2008, the number increased in December. Therefore, analysts are beginning to get
concerned that the housing market is worse than previously projected. Banks are moving slowly
to list repossessed homes for sale, which may mean that, foreclosures are higher than what
current statistics indicate.
Economic Indicators – 2nd Quarter, FY 2009
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Unemployment
The national unemployment rate topped 7.6 percent in January 2009, up from 4.9 percent in
January 2008, a 55.1 percent increase. In 2008, a total of 2.7 million jobs were lost, of which 2
million occurred in the last four months of the year bringing the total number of unemployed
Americans to 11.6 million. According to Kiplinger.com, job losses are at the highest number
since 1945. It is expected that the job losses for the year will total 3 million and the
unemployment rate will soar to 9 percent by the end of 2009.
Unemployment rate (seasonally adjusted)
Sources: U.S. Bureau of Labor Statistics
In Texas, the 2008 unemployment rate rose from 4.3 percent at the start of the year to 5.7 percent
at the end of the year, a 25 percent increase.
In the Brownsville/Harlingen metro area the unemployment rate rose from 6.5 percent in January
2008 to 8.2 percent in December 2008, a 26 percent increase for the year.
The local unemployment rate continues to rise and most experts believe that this signals the area
is headed toward double-digit unemployment rates as experienced many years ago. The
chairman of the Texas Workforce Commission states that the new challenge is “minimizing the
impact of national trends by continuing to promote the strong local business climate and address
the skills needs of Texas employers.”
Economic Indicators – 2nd Quarter, FY 2009
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Sources: Texas Workforce Commission, U.S. Bureau of Labor Statistics
Job losses are spread across a variety of industries with the exception of government and
education/health services. According to the Bureau of Labor Statistics, another discouraging
statistic is that the average hourly work week shrank last month from 33.5 hours to 33.3 hours –
the lowest level in the history of the series, which began in 1964. In an effort to cut payroll
costs, employers are reducing workers’ hours to cope with the downturn in the economy.
Workers are taking home smaller paychecks but are able to keep their jobs.
Congress has reached a comprimise on the economy recovery package totaling $787 billion,
which includes provisions to help eligible jobless workers pay for health insurance under
COBRA. For workers who have been laid off anytime through the period of September 2008 to
December 2009, the government will subsidize 65% of their premiums under COBRA for up to
nine months. Also included in the package is an increase to unemployment benefits. Jobless
workers who live in what is considered a high unemployment state will receive and additional 33
weeks of benefits. Those living in other states will receive an additional 20 weeks. The weekly
benefit will increase by $25 and the first $2,400 of benefits will be exempt from federal income
taxes.
Interest Rates
The Federal Reserve reduced its interest rate by three-fourths of a percentage point on December
16, 2008 from 1.0 percent to 0.0 – 0.25 percent. In an unprecedented move the Federal Reserve
assigned a range rather than a specific rate. It also marks the lowest rate in its history as seen in
the graph below.
Economic Indicators – 2nd Quarter, FY 2009
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Sources: Texas Workforce Commission, U.S. Bureau of Labor Statistics
According to Kiplinger.com, low interest rates by themselves are not having much impact
because the big problem with credit markets isn’t the cost of borrowing but the desire and ability
to borrow and lend. Although the federal rate cannot be cut anymore, the Federal Reserve has
emphasized that it will use other tools to fight a deepening recession.
The decline in the interest rates is meant to make funds more available to borrowers; however, it
negatively impacts investors looking to generate additional income from cash reserves. For UT
Brownsville, interest income was estimated based on an interest rate of 4.35 percent; however,
current rates are at half of what was originally budgeted. If the trend continues, investment
income will fall short of budgeted amounts by approximately $380,000. In addition, after
experiencing several years of growth in the value of endowments, major losses have been
experienced in the past few months. For UT Brownsville, unfavorable market conditions have
created a potential unrealized loss of $5.2 million for 2009 from investments of cash in shortterm and intermediate market instruments. The challenge now will be to manage cash tightly to
avoid the sales of these investments which will turn unrealized losses into realized losses.
Price of Oil
The Energy Information Administration reported on February 9, 2009 that the average price of
gasoline in the United States was $1.93 per gallon, a decrease from $2.96 per gallon a year ago,
or 35 percent. For Texas, the average gasoline price was $1.81, a decrease from $2.84 a year ago,
or 36 percent. In recent months, gas prices have leveled off and have continued to provide a
welcomed relief to the pressures that many consumers dealt with. Initial forecasts by
Kiplinger.com predict the average price of a gallon of gasoline at $2.00 for 2009.
Economic Indicators – 2nd Quarter, FY 2009
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Sources: TexasGasPrices.com
Texas remains the leading producer of oil and gas in the United States accounting for 20 percent
of the country’s total production. Being an energy producing state insulated Texas from the
dwindling economy throughout most of 2008. We all know that the price of oil and natural gas
has a direct impact on the Texas economy. The Texas State Comptroller issued Biennial
Revenue Estimates for 2010 – 2011 which forecast the average cost of a barrel of oil to be
$50.28 in 2009 and $39.55 in 2010. These figures are significantly lower than the average price
of $98.53 in 2008 and $59.02 in 2007. Forecasts from BBVA Compass Bank reflect an
estimated loss of tax collections from oil production of up to 40 percent for FY 2009 as
compared to last year. Oil prices now make up a lower share of the Texas economy; therefore,
the impact of lower prices will be less severe.
Retail Sales
According to the Kiplinger.com Economic Outlook, retail sales in November and December
2008 decreased close to 4 percent compared to the previous year making this the first holiday
season decline in decades. Despite strong sales on Black Friday, retailers reported dismal
numbers for the close of the year. Usually, holiday sales make up about 25 percent to 40 percent
of total annual sales for retailers.
A sluggish holiday season in 2008 and low sales at the start of this year can pressure retailers
into bankruptcy or business decisions that will result in store closings for 2009. According to an
article entitled “15 Companies that Might Not Survive 2009” written by Rick Newman on
February 6, 2009, businesses like Rite Aid, Claire’s Stores, Chrysler, Sbarro, Six Flags,
Blockbuster, Krispy Kreme, Landry’s Restaurants, Sirius Satellite Radio and BearingPoint to
name a few might not make it. Rick Newman is the Chief Business Correspondent for U.S. News
and World Report.
The U.S. Census Bureau announced on February 12, 2009 that advance estimates of U.S. retail
and food services sales for January were $344.6 billion, an increase of 1 percent from the
previous month and 9.7 percent below January 2008.
Economic Indicators – 2nd Quarter, FY 2009
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In January 2009, Texas experienced a 2.7 percent decrease in sales tax collections over the same
period last year from $892.7 million to $ 868.1 million.
Source: Texas Comptroller of Public Accounts
According to the State Comptroller, annual revenue collected for sales and use tax receipts grew
by 6.6 percent in Fiscal Year 2008, as compared to gains of 10.9 percent in 2007 and 12 percent
in 2006. Growth estimates for 2009 and 2010 are a mere 0.4 percent and 0.5 percent respectively.
These estimates will have a significant impact on the budget for Texas since sales and use tax
receipts represent 57.5 percent of the general revenue funds projections for the 2010 – 2011
biennium.
Consumer confidence across the nation continues to be weak, as reflected in the lowest consumer
confidence index numbers ever recorded. In January 2009, the U.S. index stood at 37.7 with the
1985 benchmark equal to 100. The West and South/Central region, which includes Texas, was at
64.1 and despite large declines it continues to be the highest of any region in the nation.
Source: Texas Comptroller of Public Accounts
Economic Indicators – 2nd Quarter, FY 2009
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Inflation
According to the Bureau of Labor Statistics, there were consistent drops in the Consumer Price
Index (CPI) over the last five months of 2008, totaling a decrease of 3.5 percent. The CPI
dropped 1.7 percent in November 2008, marking the largest decrease since 1947 and surpassing
the decrease of 1 percent in October 2008. As predicted the weak global economy dampened the
demand for energy products as it accounted for over 90 percent of the decline. Decreases in
lodging, airline, new and used motor vehicles, clothes and recreation were offset by increases in
rent, medical care and education.
Economists predict that inflation will be 1 percent for 2009 with the first couple of months
experiencing decreases in the CPI. According to Kiplinger.com, deflation is a risk; however, it is
not likely unless oil stays below $40 a barrel.
Source: U.S. Bureau of Labor Statistics
Conclusion
Over the past few months the national economic downturn has taken its toll on every part of the
region. Jobs have been lost, the number of foreclosures is rising and financial institutions are still
strained. 45 of 50 states are predicted to face fiscal problems throughout the remainder of 2009
and expected to worsen for fiscal years 2010 and 2011.
Just this month, the Texas Comptroller issued a state of the Texas Economy along with Biennial
Revenue Estimates for 2010 – 2011. She concluded that in 2009 Texas will show resistance, but
not immunity from, recessionary conditions. Texas Governor Rick Perry opened the Legislative
Session with a state of the State address which focused on continuing on the course that has
made Texas one of the strongest economies in the nation. He stated “In tough times, others see
threats; Texans see opportunity.” Despite the weakened national economy, Texas legislators are
asked to help write a budget that still meets the state’s priorities and will help Texans “weather
the storm.”
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The economy of the Rio Grande Valley has ties to the economic health of the nation and our
neighbor, Mexico. Local economic indicators are worsening due to the declining national
economy coupled with a dramatic devaluation in the value of the peso in recent months. For our
university, closely monitoring market conditions is a must. Interest rates affect our investment
income and students who may fear losing their jobs may have to postpone attending college due
to pending financial obligations.
The economic outlook for 2009 is expected to be gloomy and recovery is doubtful until 2010 or
even 2011. Companies will cease to exist and we must monitor the health of the companies that
we do business with to minimize the risk that may occur. However, on Friday, February 13,
2009, Congress passed the American Recovery and Reinvestment Act (ARRA) totaling $787
billion, which is expected to aid in the recovery and to save and/or create 3.5 million jobs.
Highlights of the stimulus plan include tax cuts for individuals and businesses, aid to the poor
and unemployed, direct cash payments to Social Security recipients, funding for new
infrastructure projects, health care for the unemployed, health research and wellness programs,
aid to states to defray budget cuts and more energy programs. Other provisions include funding
for education, housing, research in sciences, bio-fuels and physics and homeland security
programs. We will continue to monitor economic indicators for any signs of a more speedy
recovery.
Economic Indicators – 2nd Quarter, FY 2009
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Sources
BBVA Compass Bank – US Regional Watch – Economic Research Department Fourth Quarter
2008
Center for Budget Policies and Priorities. http://www.cbpp.org/9-8-08sfp.htm
Chronicle of Higher Education. http://chronicle.com/daily/2008/10/4850n.htm?utm_source=
at&utm_medium=en
CNN Money. http://money.cnn.com/2009/01/09/news/economy/jobs_december/
Emergency Economic Stabilization Act of 2008. http://en.wikipedia.org/wiki/Emergency_
Economic_Stabilization_Act_of_2008
Energy Information Administration. http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp,
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.ht
ml
Federal Reserve Bank of Dallas. http://www.dallasfed.org/research/swe/1995/swe9501a.pdf
International Monetary Fund. http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm
Invertia. http://mx.invertia.com/mercados/divisas/detalle.aspx?idtel=DI000MXPESOCASH
Kiplinger. http://www.kiplinger.com/businessresource/economic_outlook/#inflation,
http://www.kiplinger.com/businessresource/economic_outlook/#GDP, http://www.
kiplinger.com/businessresource/economic_outlook/#retail, http://www.kiplinger.com/
businessresource/forecast/archive/unemployment_feels_unending_090109.html,
http://www.kiplinger.com/businessresource/economic_outlook/#ir , http://www.kiplinger.
com/businessresource/economic_outlook/#energy
MSNBC. http://www.msnbc.msn.com/id/22780489/
Newman, Rick. "15 Companies That Might Not Survive 2009." US News & World Report. 16
Feb. 2009. <http://www.usnews.com/blogs/flowchart/2009/2/6/15-companies-that-mightnot-survive-2009.html>.
Realtytrac. http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9
&ItemID=5681&accnt=64847
Texas Real Estate Center, Texas A&M University. http://recenter.tamu.edu/.
Texas Comptroller of Public Accounts. http://www.window.state.tx.us/taxbud/bre2010/
Economic Indicators – 2nd Quarter, FY 2009
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Texas Ahead – Comptroller of Public Accounts. http://www.texasahead.org/economy/tracking/
Texas Governor Rick Perry Comments During the Opening of Legislative Session.
http://governor.state.tx.us/news/speech/11852/
Texas Workforce Commission Chairman Statements. http://www.statesman.com/business/
content/business/stories/other/01/24/0124texjobs.html
The University of Texas at Brownsville – December 2008 Year End Projection
U.S. Bureau of Labor Statistics. http://www.bls.gov/news.release/pdf/empsit.pdf, US http://www.bls.gov/eag/eag.us.htm, Texas - http://www.bls.gov/eag/eag.tx.htm;
Brownsville/Harlingen MSA - http://www.bls.gov/eag/eag.tx_brownsville_msa.htm
U.S. Census. http://www.census.gov/marts/www/marts_current.html, http://www.census.gov/
const/newressales_200811.pdf
Wikipedia. http://en.wikipedia.org/wiki/Federal_funds_rate
Yahoo! Finance. http://finance.yahoo.com/
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