2004, No. 2

Coastal Bend Economic Profile

Inside this Issue Crossroads …………………………… Area Economic Profile ………..…..... A Different Melting Pot ..………..….. Real Estate Bubble ………………..… Another Texas Triangle ……….….…

p. 1 p. 1 p. 2 p. 2 p. 3

Along with an economic update for our region, this issue contains four articles that address longer-term issues related to economic development of the Coastal Bend. The first article provides an economic perspective of the Coastal Bend area during the last decade. By focusing on the problem of illiteracy and assimilation of Hispanic immigrants, the second and third articles discuss some major obstacles to economic development in the Coastal Bend area. The fourth article explores the vulnerability of falling home prices that might adversely affect regional economic growth in the future.

Economy at a Crossroads The regional economy is still humming along. Despite recent rises in interest rates, the cost of borrowing remains relatively low. Corpus Christi appears to be undergoing a facelift as new business and residential buildings, and shopping malls are being erected alongside numerous road construction projects. Economic recovery at the national level has also gained momentum, adding upward pressure on inflation. In response to such developments, the Federal Reserve began a new cycle of monetary tightening at the Federal Open Market Committee meeting on June 30. Another 1/4 point raise of the Federal funds rate on August 10 further confirmed the Fed’s view of the economy and its policy stance. And the Fed is expected to continue to act in the current direction that will raise market interest rates at least through the end of 2005. Without any positive developments, rising interest rates could soon put an end to the current construction boom. In this case, the economic fortune of the region would rely more heavily on household spending, which accounts for about 2/3 of area economic activity.

What makes up the Region? The boundary of the Coastal Bend region varies slightly according to different government agencies. According to the Texas Workforce Commission’s geographical definition, this region consists of 12 counties in South Texas: Aransas, Bee, Brooks, Duval, Jim Wells, Kenedy, Kleberg, Live Oak, McMullen, Nueces, Refugio, and San Patricio. The counties of Nueces and San Patricio form the Corpus Christi metro area. Population growth has lagged behind Texas … The 12 counties of the Coastal Bend have a total population of about 550,000 (see Chart 1). Corpus Christi is the largest metro area in our region, with a population of 382,000, or 70% of the regional total. Between 1990 and 2002, the population in the area grew at an average annual rate of 0.9%, which was lower than the Texas state average of 2.05% and the national average of 1.19%. According to the Census Bureau, the regional population is projected to grow through 2010 at about the same pace as in the past decade. So too was regional economic activity … During the past decade, economic activity in the Coastal Bend also appeared to lag behind the rest of the nation. Between 1990 and 2002, the area’s gross regional product—the broadest measure of the size of a regional economy—grew at 1.58% per year on average. Economic growth in the area lagged significantly behind the nation (2.88%) and particularly the state of Texas (4.55%). Economic activity is the driving force for job creations and household earnings. During the 1990-2002 period, the region witnessed an annual average of 0.9% employment growth, which was lower than the national and state averages around 1.5%. Improving labor market on the net … Because of relatively slow regional population growth and thus labor force expansion, the Coastal Bend has appeared to fare better than many other cities in Texas in terms of joblessness since the 2001 national recession. In 1990, the region’s unemployment rate was about 10%, which was 2.5

percentage points higher than the national average. In 2002, the local 6.3% unemployment rate was on a par with the rest of the nation. Slow income growth Similar to other economic indicators, the region’s personal income per capita of $23,753 in 2002 was lower than the national and state averages. The relatively low income level, particularly in comparison with $28,551 statewide, is attributable to the relatively slow growth in employment and wage earnings during the past decade. The current average wage for the region is $14.05 per hour, which is more than $1 below the average of $15.52 nationwide or $16.30 statewide. The relatively low wages and income earnings for workers in the Coastal Bend area can be explained by educational attainment. Educational attainment is an indicator of workforce preparedness and thus workers’ earning potentials. As shown in Chart 1, the latest Census data for the Corpus Christi metro area indicate that the area lags behind the rest of the nation in workforce development. In particular, about one in four residents in Corpus Christi does not finish high school, as compared to one in six for the nation as a whole. Structural Shifts In line with the national trend, a significant amount of employment in the Coastal Bend has shifted from manufacturing-oriented industries to service-oriented industries. Chart 2 provides an overview of employment in the broad sectors of the region in comparison with Texas and the U.S. The bar charts are organized by employment according to the NAICS classifications of “supersectors.” The overall employment composition for the Coastal Bend area resembles closely those for the state and the U.S. The Coastal Bend economy is represented by a diverse mix of sectors. The “information” sector, which includes telecommunication and software publishing, is the smallest (2%) but its employment share is also equally small at the state and national levels. See Economic Profile, page 3

1

Assimilating to a Different Melting Pot Lackluster is how many would describe the Coastal Bend economy over the last 20 years or so. Indeed, growth in regional population, workforce and income have been about half of the state average. A popular culprit is our region’s close proximity to Mexico, which has suffered even less favorable economic conditions. But then why this geographical link matters is not well understood. The proximity of the Coastal Bend to Mexico affects its demographic composition. In the Corpus Christi metro area, over 20,000 residents are first-generation immigrants, 5.5% of the total population. About three quarters of these immigrants are originally from Latin America, with the great majority from Mexico (see Chart 3). Economic Assimilation Recent studies by Pia Orrenius (2003, 2004), an economist at the Federal Reserve Bank of Dallas, have revealed that Mexican immigrants are the least educated among all immigrant groups. Yet, despite their disadvantages, such as lack of English fluency and familiarity with U.S. laws and institutions, they assimilate well economically. Partly because of their stronger commitment to work, the income levels of these immigrants reach those of U.S. natives with similar education levels after 16-20 years in this country. However, because of their lack of skills and education, these immigrants will not achieve the average income level of U.S. natives within their lifetimes. Orrenius estimates that different educational levels explain about two-thirds of the wage gap for Mexican Americans. Although many immigrants go to school once they are established in the U.S., they primarily learn English but do not pursue formal education or skill training.

Educational Assimilation Economic and educational assimilation of immigrants continues, and continues to improve, after the first generation. High school dropout rates for immigrants indeed improve from one generation to the next, dropping from 27 percent in the first generation to less than 10 percent in the third generation. However, there are vast differences among immigrant groups. While Hispanic immigrants make the largest gain between the first and third generation, they do the worst in general (Chart 4). The dropout rate among Hispanic immigrants is almost double the dropout out rate for non-Hispanic immigrants, even in the third generation. Since these third-generation immigrants are U.S.-born citizens of U.S.-born parents, they should be no different from the natives in educational attainment. The major suspects for this gap in education include lower immigrant household income, fewer years of parental education, and larger family sizes. Recent surveys have also indicated that Hispanics have lower educational aspirations than some other ethnic groups.

area, local policymakers need to ensure there is only one melting pot: To promote the desire, and the availability of resources, for Mexican-American immigrants to aspire to and reach the educational level of other Texan demographic groups.

One Melting Pot As pointed out in another article of this publication, educational attainment is an important issue in economic development. Immigrants have contributed to over 40 percent of U.S. labor force growth in the past decade, and their children account for one in four students in Texas. The children of Hispanic immigrants indeed outperform their parents. Yet they appear to assimilate not to the national average but to the Hispanic average in educational and thus economic outcomes. Given the prominence of the Hispanic population in the Coastal Bend

Chart 4. Immigrant Dropout Rates in the U.S. (16- to 24-year-olds)

Chart 3. Corpus Christi MSA Demographics % Total Population

370,804

Foreign Born

100%

20,404 5.50%

Foreign from Latin America

14,792 3.99%

Race Hispanic

204,318 55.10%

Hispanic Mexican

173,294 46.73%

Source: 2002 Census.

Percent 50 40 30 20 10 0 1st Generation

2nd Generation

Non-Hispanic

3rd Generation

Hispanic

Source: National Center for Education Statistics (2001).

Real Estate Bubble Trouble? line with fundamentals that they are vulnerable to Overall home prices in the Corpus Christi metro area have risen dramatically. The local median home price this June was $118,600, an appreciation of 11% in one year (Chart 5). Such an increase has raised concerns about the possibility of a real estate bubble. Indeed, home appreciation of this magnitude is not a local phenomenon. Driven by historically low mortgage interest rates, the median home price nationwide has soared 9.6% in the past year. A bubble in real estate would develop if increases in home prices leave them so far out of line with fundamentals that they are vulnerable to

References: Pia Orrenius, “Immigrant Assimilation: Is the U.S. Still a Melting Pot?” Federal Reserve Bank of Dallas, Southwest Economy, May/June 2004. Pia Orrenius, “U.S. Immigration and Economic Growth: Putting Policy on Hold,” Federal Reserve Bank of Dallas, Southwest Economy, November/December 2003.

sizable declines. If a real estate bubble does in fact emerge, then the local economy could be adversely affected once the bubble bursts. The effects of falling Internet stock prices in 2001 are good examples of how a bubble burst affects the U.S. economy. In the case of the housing market, falling home prices reduce the overall wealth of households and thus consumer spending. Also, fears that home prices could fall further may deter home sales and construction of new homes.

Chart 6 Chart 6. Home Affordability Index. June 2004

June 2003

Corpus Christi

1.08

1.22

Texas

1.08

1.08

U.S.

1.11

1.11

Dallas

1.12

1.12

Houston

1.10

1.09

Austin

1.26

1.26

San Antonio 1.26 Source: Real Estate Center, TAMU.

1.31

Other Texas Cities:

See Bubble, page 3

2

Economic Profile

Continued from page 1

Chart 1. Regional Economic Statistics. 2002 Level Indicator Population Output Employment Per capita personal income

550,073 $12 bil 230,067 $23,753

Coastal Corpus Bend Christi Texas U.S. Avg. Annual % Change 1990-2002 0.90% 0.80% 2.05% 1.19% 1.58% 1.90% 4.55% 2.88% 0.90% 0.93% 1.86% 1.17% 4.15% 4.23% 4.51% 4.11% Latest Level 6.3% 6.2% 6.3% 5.8% $23,753 $25,308 $28,551 $29,770 $14.05 $14.65 $16.30 $15.52 2002 Census (%)

Unemployment, 2003 Per capita income, 2002 Mean Wage, 2003 Educational Attainment Population 25 years and over High school graduate or higher 75.0 77.7 Bachelor's degree or higher 19.5 24.5 Graduate or professional degree 6.2 8.0 Sources: Texas Workforce Commission, Census Bureau and Bureau of Economic Analysis.

82.6 25.9 9.4

Out of the 12 broad sectors, five have a larger share of employment in the region relative to the rest of the nation: natural resources and mining; construction; education and health services; leisure and hospitality; and government. Some of these employment concentrations reflect the particular economic landscape of the area. For example, oil and gas extraction and other petrochemical related industries are captured by the sector of natural resources and mining; and the military bases in Corpus Christi, Ingleside and Kingsville account for many government jobs at the federal level.

This article contains excerpts from a recent study “Industry Cluster Analysis for the Coastal Bend Workforce Development Area” by Jim Lee for the Coastal Bend Workforce Development Board. Chart 2. Sectoral Composition of Employment, 2002. Percent of Total Employment 0

5

10

15

20

25

Natural Resources & Mining Construction Manufacturing Trade, Transportation, & Utilities Information Financial Activities Professional & Business Services Education & Health Services Leisure & Hospitality Other Services Government Coastal Bend

Texas

U.S.

Source: Bureau of Labor Statistics.

Another Texas Triangle

Bubble

In terms of literacy, Corpus Christi ranks the bottom third of the 79 cities reported by the USA Today. This ranking is based on a study at the University of Wisconsin-Whitewater, which draws on data for U.S. cities with a population of 200,000 or more. The measures of literacy include education attainment; booksellers; newspaper circulation; library resources; and periodicals published. Among the cities in the study, Corpus Christi ranks 64th in education attainment; 60th in the number of booksellers; 68th in newspaper circulation; 70th in library resources; and 75th in periodicals published. According to the study, Minneapolis, Seattle and Pittsburgh are the most literate cities. While the methodology of any study can easily be challenged, the overall difference between the top- and bottom-ranking cities on the list is clear. And Texas is home to half of the bottom 10. El Paso is reportedly the least literate American city and San Antonio is only two places above Corpus Christi. According the USA Today report, the low rankings of these cities are attributable to the larger percentage of immigrants, many of whom are relatively poor and with little schooling. Geographically, these three cities form a triangle. This Triangle of Illiteracy stands in sharp contrast to another Texas Triangle recognized recently by the Federal Reserve Bank of Dallas for the economic strengths of the cities within—Austin, Dallas/Fort Worth, Houston and San Antonio. Not surprisingly, Austin ranks highest among all Texas cities. The levels of illiteracy and under-education adversely impact a community’s quality of life as well as economic development. For this reason, the findings in the report should be a major concern for Corpus Christi as an All-American City. For more information on the University of Wisconsin-Whitewater study, go to www.uww.edu/npa/cities.

However, a market bubble is difficult to detect. It becomes evident only after a market correction occurs. Compared to rises in consumer prices, which averaged about 2.5% in the past year, the rises in housing prices appear to be excessive. In fact, home prices have been increasing steadily since the Federal Reserve progressively cut the interest rate to historic lows in 2003. The risk of falling prices in housing, however, also depends on its affordability, which reflects both income and mortgage interest costs. Housing in Corpus Christi has become less affordable, according to the Affordability Index of the Real Estate Center at Texas A&M University. This index is the ratio of median household income to the income required to buy the median-priced home using currently available mortgage financing. Standard financing is a 30-year loan with 20 percent down at the average prevailing mortgage rate. An index of 1.00 indicates that the median household income is just enough to qualify for a loan sufficiently large to purchase the median-priced home. The higher this index, the more affordable is housing. For Corpus Christi, the index of housing affordability in this June was 1.08, which coincided with the Texas statewide average (Chart 6). This reading represents a 14% reduction from last June, while such a measure has remained roughly the same for many major cities in Texas. The drastic decline in local home affordability reflects the fact that home appreciation in Corpus Christi has more than offset the gain in households’ ability to finance a home due to income growth and lower mortgage interest costs. As John Duca, an economist at the Federal Reserve Bank of Dallas, observes: “… although there is little risk of a national bubble, prices in some See Bubble, page 4

from page 2

3

Texas A&M University-Corpus Christi College of Business 6300 Ocean Drive Corpus Christi, Texas 78412 USA

Pulisher’s Notes Texas A&M University-Corpus Christi College of Business Dr. Moustafa H. Abdelsamad Dean, College of Business & Director of Center for Business & Economic Research Editor: Jim Lee, Professor of Economics Co-editors: Marilyn Spencer, Professor of Economics David Yoskowitz, Associate Professor of Economics Special thanks to Ms. Mervat Abdelsamad for valuable advice and assistance in this project. Corpus Christi and Coastal Bend Economic Pulse is a publication of the College of Business at Texas A&M UniversityCorpus Christi, 6300 Ocean Drive, Corpus Christi, Texas 78412; phone: (361) 825-5831; fax: (361) 825-2725; email: [email protected]. For a copy of this newsletter or more inform-ation about the Corpus Christi economy, visit us online at http://cob.tamucc.edu/pulse. Articles may be reprinted on the condition that the source is credited and a copy is provided to the editorial staff of the Economic Pulse. Any opinions expressed or implied are solely those of the original authors and do not reflect the views of the College of Business or Texas A&M University-Corpus Christi. Please send correspondence to Jim Lee, (361) 825-5831 or email [email protected].

Nonprofit Org. U.S. Postage PAID Permit No. 954 Corpus Christi, TX

Bubble__________

from page 3

areas are vulnerable if local economic conditions deteriorate.” Housing in Corpus Christi remains relatively ‘affordable’ and whether a bubble has developed in Corpus Christi remains to be seen. But one thing is for sure: the risk of falling home prices will soar if they continue to rise at the current rapid pace. Reference: John Duca, “How Vulnerable Are Housing Prices?” Federal Reserve Bank of Dallas, Southwest Economy, March/April 2004. Chart 5. Median Home Price. $160,000 Texas $120,000 Corpus Christi $80,000

$40,000

$0 1994

1996

1998

2000

2002

2004

Source: Real Estate Center, TAMU.

4

-- This page intentionally left bank --

5