Cross-Border Economic Bulletin - March 2001

Recession Worries in San Diego and Baja California

A year and a half ago, California was riding high on the dot.com boom, economic analysts were worried about an overheating economy, and people gave little thought to energy prices. In the last few months, the public’s perception of the economy did an about face and many people assume that we are heading into a recession. Federal Reserve Chairman Alan Greenspan recently downplayed the probability of a recession, and while most economic indicators support his view, everyone should recognize that it is exceedingly difficult to accurately predict major turning points in the economy.

At the local level, the economy continues to look robust, but whatever happens at the national level will show up in San Diego, sooner or later. This issue of the Cross Border Economic Bulletin looks for indicators of recession in the border economy, and provides a few descriptive statistics on the impacts of previous recessions on the maquiladora industry. Its major findings are:

· San Diego’s economy is closely tied to the national economy, and will ultimately move in the same direction as the nation;
· Most of the evidence for recession comes from the national—not local—manufacturing economy;
· Overall, national and local job growth continue to be positive;
· On average, recessions in the US have a negative impact on the maquiladora industry in Tijuana and Mexicali, but the impact is highly variable.

San Diego and the Nation

Not too long ago, theories were circulating that San Diego’s economy had become recession proof. The downturn of the early 1990s dispelled this idea as San Diego’s economy fell into recession about the same time as the rest of the nation. The local effects of cuts in defense spending, the collapse of the real estate market, the tail-end of the savings and loan crisis, and a drought in California’s Central Valley, caused a longer recession in the state and in San Diego than in the nation.

Looking back at the last several decades, all of the key economic indicators for the health of the local economy—indicators such as income growth, employment, and prices—move with changes in the national economy. The turning points of local variables may lead or lag the turning point of the same variable at the national level, but their movement is highly correlated. Figure 1 illustrates this point for one important indicator, the unemployment rate.

San Diego and national level unemployment rates last turned up in 1989. National rates peaked in 1992, and San Diego rates peaked one year later, in 1993. The most important point to be gleaned is that the unemployment rate in San Diego moves with the national rate. Local rate tends to hold at a level slightly below the national rate, with the exception of the turbulent years of 1992-1996, when the two rates were either the same, or higher in San Diego.

The Changing Employment Scene

The extent of US and San Diego job growth over the last year, both in total and by sector. The most salient features are the continued growth of jobs in the nation and San Diego, and the decline in manufacturing employment at the national level. The downturn in manufacturing at the national level is the primary reason for much of the recent recession scare.

US manufacturing employment has been trending downward since March of 1998—for two full years.

In a sense, a downward employment trend in manufacturing is normal for the US, since manufacturing employment peaked around 1980 and the increase from 1993 to 1998 is the exception rather than the rule. The long run downward trend has reduced the manufacturing labor force by around a million workers since 1980, and is often portrayed as a threat to long run economic health. In fact, however, the long run loss of manufacturing employment is primarily due to the rapid increase in productivity in manufacturing. Consider for example, that US based firms produce 50% more output today than they did in 1987, but they use many fewer workers. The productivity increase and the decline in employment parallels the change that began in US agriculture over a century ago.

US Recessions and the Maquiladora Industry

It is well known that the maquiladora industry is strongly linked to the US economy, and that a recession in the US is likely to have a greater effect than a recession in Mexico. For example, during the Mexican recession of 1995, the maquiladora industry added about 9% more jobs even though the national Mexican economy declined by 6%.

Ffrom 1980 to the present, there were three US recessions. The first recession was mild and lasted barely 6 months in 1980. The second was more severe, and lasted from July, 1981 through November, 1982, and coincided with the onset of Mexico’s debt crisis in August, 1982. The third recession was relatively minor, and lasted from July of 1989 through March, 1990.

In order to look at the situation more closely, I calculated the rates of growth in employment for each month since 1980, and divided the growth rates into two groups: those that overlapped the recession months in the US, and those that did not. There is a strong effect of US recessions on average monthly employment growth, dropping it from over +1% to less than -1% in Mexicali, and around one-half percent in Tijuana. Nevertheless, growth during a recession is still positive, on average, in Tijuana.

During recession periods, negative growth occurred in 45% of the months in Tijuana and in 64% of the months in Mexicali. When there is no recession, however, growth is still negative during 27% of the months in Tijuana and 32% of the months in Mexicali. In sum, while it appears that recessions in the US significantly increase the probability of a downturn in local maquiladora employment, that outcome is by no means certain.

The Cross-Border Economic Bulletin is prepared monthly by Dr. Jim Gerber, professor of economics at San Diego State University. It is underwritten by Concert, a global venture of AT&T and BT.