Bottom of the List
I’m about as pro-Texas as you can reasonably (some would say unreasonably)—get, and I always hate to see our great state fall in rankings below others we’d like to top. The latest one that caught my eye is the abysmal placement of Texas and its largest metro areas in the area of credit scores, the system used by lenders and others to evaluate risk. Does it surprise you to know that Texas is dead last? Or that Houston and Dallas-Fort Worth garnered spots number 19 and 20 of the cities analyzed? (There were 20.) Given that the economy of the Lone Star State has been generally growing faster than other areas, you would think we could do a little better.
The people doing the study, Experian, looked at millions of credit scores from people across the US and computed metro area and statewide averages. I guess there’s something to the stereotype of New Englanders being close with their money, because that’s the region that ranked highest. Interestingly, though, the region also has the highest level of debt (excluding real estate). The West South Central region (Texas, Oklahoma, Louisiana, and Arkansas) has the lowest average index rating, well below much of the rest of the country.
Should we be alarmed by this? Yes and no. “Yes” because it’s a clear indication that Texans aren’t managing credit as well as those in other areas (at least in the way lenders look at it) and will be faced with higher interest charges in the future. (I’ve touched on the importance of credit information in this space in the past.) However, to the “no” part of the answer, credit scores are only one piece of information in a list of items used by lenders in evaluating applications. Moreover, they deal solely with the past.
Credit scores are not what many people think they are. Under one widely used model, the largest determinant of your score is your payment history for various accounts, including the number overdue and those paid as agreed. Also important are the amounts owed and their relationship to the total credit you have available. The length of time since accounts were opened is considered, as are the number of recently opened accounts. Inquiries play a small role.
This leaves out many variables integral to the ability to repay debt, such as salary and occupation. In addition, age is not considered. No matter how well a twentysomething is managing his/her money and regardless of his/her likely future income stream, a score at the top of the rating chart is improbable. Texas’ relatively young population tends to pull down our average.
In looking at the data further, it became apparent that a key drag on Texas’ ranking is a relatively high number of late payments. Like bankruptcies, however, this is often a lagging indicator of previous financial trouble rather than a portent of things to come. Even so, it’s clear that an abundance of people with poor credit ratings is not a good thing for an economy.
For individuals with poor credit ratings, the consequences go beyond increased difficulty in borrowing. Lenders consider credit scores (and other information such as income) in deciding whether to extend a loan. They also use creditworthiness in determining the interest rate that will be charged. Lowest rates are often offered to potential customers with scores above certain plateaus. If you meet the criteria, you could save tens of thousands on mortgage interest, for example, if the bank offers you a half-point better deal.
Improving a credit score takes time, but it can be done. Making payments on time, keeping down outstanding credit card balances as a percentage of your total available credit, and other actions can make a difference. There are many reputable people out there who can help.
From the perspective of an economist, the fact that Texas ranks last among all states is clearly not good news. It points to potential future problems with consumer spending and greater leakage from the economy in the form of higher interest payments. However, it’s important to remember that credit scores are another lagging indicator. As the economy improves and incomes continue to rise, I think we can expect our ratings to begin inching up. I just wish we didn’t have so far to go.
Staying in the Saddle
President Bush has endorsed Alan Greenspan for another term as chairman of the Federal Reserve System (or, the Fed). I truly believe that Greenspan has become one of a handful of the most powerful people in the world. Who else can move markets by simply uttering a phrase? (Remember “irrational exuberance?” Your stock portfolio certainly does.) Fortunes change hands when he decides or declines to recommend an interest rate movement, at times even when the inflection in his voice moderates a bit. Moreover, the largest economy in the world is under his guidance.
The Federal Reserve System is made up of regional banks which are responsible for auditing banks, clearing payments from banks to other banks through an automated system, distributing coins and bills, and so on. In addition, the Fed has power over monetary policy through its ability to influence the rates of interest banks pay each other or the Fed to borrow money. Banks and other financial institutions are constantly borrowing money from each other and from the Fed to meet reserve requirements (which also happen to be set by the Fed). If banks’ costs of borrowing go up, they in turn will generally raise the interest rates they are charging. Eventually, a change in the federal funds rate will influence interest on mortgage loans, credit cards, and virtually every other form of debt.
In essence, Greenspan is the key individual in any decision to raise the federal funds rate. Theoretically, he is looking at the state of the economy and trying to fulfill the Fed’s role of maximizing economic growth while maintaining stable prices and moderate interest rates. Based on his perceptions, he makes a recommendation regarding interest rates. One of the nice things about monetary policy is that it is somewhat removed from the vagaries of political parties and approval ratings. The Fed is a sort of check and balance for other policy related to the economy. The better the person at the helm, the better this works.
Mr. Greenspan has been chairman since 1987, when he was appointed by Ronald Reagan. Another term sets a record for longest tenure in the chairman’s position. Through the first President Bush’s term, both of President Clinton’s, and the current President’s time thus far, he has stayed true to the course of keeping a tight lid on inflation. Growth through the period, while not without its share of cyclical fluctuations, has been nothing short of remarkable.
I haven’t always agreed with Mr. Greenspan’s policy decisions. I have often felt, for example, that he focused too much attention on inflation to the unnecessary detriment of economic growth. But that’s beside the point. There is no doubt about the fact that he knows his way around the process. It’s astounding the amount of attention his every move garners on Wall Street. With a less-experienced person in such a position with today’s volatile markets, the market would have seen even greater difficulties. One poorly worded comment could lead to untold gyrations. I can’t imagine anyone more appropriate for the job.
In a time plagued by uncertainty, it is clear that we could do far worse than to continue under his leadership. As the war in Iraq goes on, the terrorist threat remains, energy prices surge, and a presidential election looms, it’s a very good thing to keep consistency in the Fed leadership.
Through the Looking Glass
Many people don’t realize that Lewis Carroll (the Reverend Charles Ludwig Dodgson) wrote Alice in Wonderland as an allegory about mathematics. At present, the stock market is once again in one of those moods where it might as well be one of the good parson’s stories. It is “through the looking glass”—where black is white and white is black.
For months, analysts and investors alike have lamented the “jobless” recovery. All of a sudden, the cosmos appears to be in order. Stronger purchasing activity depleted inventories, and more overtime persisted until a hiring binge was finally unleashed. During each of the past two months, the US economy has added about 300,000 jobs. The market should be really excited. Right?? Wrong!!
We are now entering one of those quirky times when good news is bad news and bad news is good news. It’s happened before. During the time I’ve been practicing the dismal science and losing my hair, I have seen and chronicled several such periods. No sooner does the economy get cranked up than folks start to worry about interest rates going up. As the Federal Reserve held its recent policy meeting, many of the obsessive market watchers were hoping interest rates would be raised and almost begged for it. The decision was made to keep them steady for now, but “guidance” was given that rates would be going up soon. After thinking about it over the weekend, the same pundits decided maybe they didn’t want that after all, thus sending the Dow Jones Index into triple-digit decline.
These are conditioned responses—not unlike Pavlov’s dogs. When growth is sluggish, they want more. When they get more, it’s too much. Thus, we are about to see an extended period in which every piece of good news about the economy will be greeted with horror by the investment community. Never mind that long-term economic growth is the best, indeed, the only way to assure that most firms can achieve the sustainable and increasing profitability that drives stock prices upward.
The process begins when the Mad Hatters in Washington tell Alice and her fellow investors that orders are flourishing, production is soaring, and jobs are being created at a brisk pace. All is right with the world. The response is “Oh! No! Interest rates are going up! Sell! Sell! Sell!” The market responds accordingly, and billions in paper wealth vanish in the wake of positive news.
Weird? Yeah. The Federal Reserve tries to use interest rate policy to achieve a delicate balance between growth and inflation. In recent history, it has probably erred on the side of overzealous protection against rising prices (interest rate policy is not especially well suited for that purpose in any case, but that’s a subject for a different day). Thus, at the first sign of a booming economy, we tend to fight a war against inflation that doesn’t really exist. Our last downturn was worse than it needed to be due to excessive rate increases during the upswing.
The bottom line is that we have entered a new era in which productivity gains derived from globalization, technology, and a very well-trained workforce permit extended expansions without inflation. The only signs of inflation at present stem from higher petroleum prices. The last time I checked, those weren’t much influenced by wiggling US interest rates. Nonetheless, it is likely going to take a couple of additional cycles before the powers that be figure this one out. So, like it or not, interest rates will be going up in the next few months. Even in Wonderland, conventional wisdom can be quite stubborn, and we must once again view our economic well-being through the looking glass.
Texports
Texas led the nation in the volume of exports last year for the second time in history, edging out California once again for the top spot. The total value of Texas exports climbed $3.5 billion from the 2002 level to reach $98.85 billion. That’s nearly 14% of the US total. Mexico and Canada were our top two trading partners by a wide margin. Business with Mexico totaled nearly $41.6 billion, 42% of the total Texas trade. Commerce with Canada added another $10.8 billion. While Canada is certainly an important market, Mexico is obviously the key to the growth in Texas exports.
The inter-related nature of the economies of the US and Mexico is beyond question. This trade activity represents a crucial source of business activity for virtually all regions of the US. Strong cultural and familial ties link Mexico with the US border region and beyond. The flow of goods and people is vital to the ongoing economic health of families, corporations, cities, regions, and states.
Trade with Mexico has risen markedly over the past decade. Since NAFTA was implemented in 1994, US export volumes with Mexico have grown some 91.7% from $50.8 billion in 1994 to $97.5 billion in 2003. Although sluggish economic conditions and security issues dampened the pace of growth recently, expanded trade is again being observed and, assuming no major disruptions of border traffic, is expected to continue and accelerate for the foreseeable future.
Over the past 12 years, the volume of Texas exports to Mexico has almost tripled. Key export goods include computers and electronic equipment, chemicals, nonelectrical machinery, transportation equipment, petroleum and coal products, electrical equipment, appliances and parts, fabricated metal products, processed foods, agricultural production, and plastics and rubber products.
One reason for this rapid growth is activity linked to maquiladoras. According to a report by the El Paso Branch of the Federal Reserve Bank of Dallas in 2001, there were 3,735 maquiladora plants employing almost 1.3 million people. These plants have been crucial in the reorientation of the Mexican economy toward growth through export production. Over the past two decades, the share of international trade in Mexico’s gross domestic product has grown substantially.
While these operations are clearly vital to the Mexican economy, they are also critical to firms on the US side. One such example is the Delphi Company. A spokesperson for Delphi has been quoted as explaining that some 70,000 workers in Mexico support 700,000 American workers in US plants. Without the ability to efficiently utilize Mexican facilities and laborers to contain costs, the company might be forced to move these jobs offshore. With the implementation of NAFTA, integrated production has extended well beyond the immediate border region.
Yet another aspect of the importance of Mexico to Texas is spending by Mexicans in the border region and beyond. Thousands of Mexicans cross the border into the US every day to shop in retail outlets in the US. Other Mexicans cross into the US to work (and legally stay). The magnitude of the US workforce comprised of Mexican citizens is a further indication of the symbiotic relationship between the two countries. Mexicans represent an important source of labor, particularly in certain industries.
Interaction with our neighbor to the south is one of the primary drivers of economic growth in many areas of Texas. The flow of goods and people across the border results in substantial gains for both nations. Trade-related activity is, in fact, one of the most crucial elements of any growing economy.