Tailspin: From bad to worse

When our economy series was conceived, we set out to take a close look at the lives of Rio Grande Valley residents against the backdrop of a widening economic crisis.

Since then, economic forecasts have gone from bad to worse, and late last week, the U.S. government offered the most sobering news yet: The country is headed for a recession.

The economy shrank over the summer, and consumer spending - which accounts for nearly two-thirds of the economy - dipped to lows not seen in three decades.

The gross domestic product - which measures national income and output - dropped to 2.8 percent in the third quarter, shrinking 0.3 percent from July to September, with many analysts forecasting declines for the October-to-December period and the first quarter of 2009.

If the economy contracts as anticipated, jobs cuts will likely follow.

The National Bureau of Economic Research, a nonprofit organization that is the official judge of business cycles, has yet to make a determination about whether or not the country has entered a recession.

The average person may not be adversely affected by a recession, especially those holding government or healthcare jobs.

Manufacturing and retail, however, are vulnerable to recession, and account for many of the jobs lost this year.

On Friday, the U.S. Department of Labor reported that employers cut 240,000 jobs in October, sending the unemployment rate to a 14-year high of 6.5 percent.

All this upheaval exists despite repeated government attempts to lift the economy out of the doldrums, and experts agree this is one slump that will not be easily cast off. Some analysts even are predicting a recession of at least two years.

However, national trends have never offered us much insight into local trends, and the weakening economy is affecting the lives of Valley residents in different ways.

Augustin Torres, a retiree of the Texas Department of Aging and Disability Services, effectively was priced out of his retirement. To compensate for rising costs, the 61-year-old Mercedes resident went back to work.

Alamo resident Juan Esparza had created a successful commercial and residential painting business. Because the Valley's housing market has stagnated, the 40-year-old family man now finds himself making daily trips to San Antonio to find new clients.

In the short term, the downturn will force families to reevaluate how they spend their money, said Mostafa Malki, assistant professor of economics at the University of Texas-Brownsville/Texas Southmost College's school of business.

"I don't know if that's a good thing or a bad thing, but it's the reality. People have to adjust their behavior."

THE PESO'S INFLUENCE

If the Valley is insulated from the broader U.S. economy, it is largely because of its proximity to Mexico, and local businesses can more accurately forecast future sales activity based on the strength of the Mexican peso to the dollar.

The relative stability of the Mexican peso in recent years has sustained the Valley through the front end of the storm.

Lately, that has been changing.

The peso has been losing ground to the dollar amid a global economic slowdown, leaving the Valley especially vulnerable.

"We have this double-edged sword," Malki said. "If the Mexican economy doesn't do well, then neither does ours."

When essentials become too expensive, as gasoline did earlier this year when it topped $4 per gallon, communities along the border once again benefit from their proximity to Mexico. Gasoline consumers, from farmers to shrimp boat captains, headed to Mexico to fill their tanks at prices far lower than those found on the U.S. side of the border.

Consumer dollars will continue to be the main driver of the economy, but to what extent is unclear.

People need to eat, but when money is scarce, consumers modify their spending. A costly meal at a restaurant or a night out at the movies is no longer an option, as we found out in our reporting.

In the short term, some price pressures have abated, most notably the price per gallon of gasoline. But the same forces that drove prices up to begin with probably will do so again when the economy eventually recovers.

"Prices are sticky," Malki said. "They don't respond very fast to major changes. Right now, it's just a big question mark to see what is going to happen."

BORDER RESILIENCE

Alberto Davila, chairman of the department of economics and finance at the University of Texas-Pan American in Edinburg, argues that the economically depressed Valley could be better equipped than many, more prosperous parts of the country to handle a recession. While a prosperous region probably is unfamiliar with economic hardship, it surely will struggle to adjust to a downturn. But double-digit unemployment and historical poverty trends are conditions many Valley residents know all too well.

Davila likened the experience to the generation that lived through the Great Depression.

"There is some experience that you gain, that consumers have here, that others in more prosperous areas haven't," Davila said. "There is something to be said for our population being better able to cope."

Both Davila and Malki believe the Valley will emerge from this economic crisis more resilient than before, though it is less clear how it will change the local economy. Just as the Great Depression led to the creation of the welfare state, the current financial meltdown has led to an unprecedented $750 billion bailout, and even government ownership of insurance giant American International Group Inc.

A shift to a public-private business model could be unfolding locally, as well.

In Brownsville, a local developer and the city were negotiating the development of baseball park for an independent baseball league team.

The project has stalled, but that sort of structural change toward a stronger public sector and weaker private sector very well could be the future of economic growth in the Valley, Davila said.

"Whether that's good or bad, we'll see," he said. "It will be interesting to find out."