Interesting piece which shows how we're all connected.... -Angela
Latin America Feels Pain of U.S. Housing Slump
By JOEL MILLMAN
April 23, 2007; Page A2
OAXACA, Mexico -- The slowing U.S. housing market already has taken a bite out of the U.S. economy. Now, the fallout is spreading to Latin America.
That's because home construction is the principal gateway industry for immigrants entering the U.S. labor market. Those immigrants contribute the lion's share of the estimated $50 billion in cash sent annually from the U.S. to family members and others in countries south of the border. That tide of cash appears to be ebbing.
Monthly remittances from the U.S. to Mexico have dropped every month since their peak of $2.6 billion in May 2006 -- shortly before new-home construction in the U.S. plunged. In February 2007, the latest month for which data are available, remittances to Mexico had slowed to $1.7 billion.
Mexico, Latin America's remittance leader, may be a leading indicator of a trend unfolding across the continent. In a recent study of 15 Latin American economies tracked by BCP Securities of Greenwich, Conn., all but three showed better than a 90% correlation between the ebb and flow of U.S. housing starts and the swelling and shrinkage of remittances as recorded by the nations' central banks.
"The contraction in remittances will dampen domestic consumption and hamper [economic] growth rates" in countries ranging from Mexico to Colombia to those in Central America, said the study's author, BCP Securities economist Walter Molano.
The slowdown could be double trouble for Mexico, where the economy has already started to slow because of weaker growth across a wide array of American industries that depend on Mexico for parts or final assembly. U.S. gross domestic product, the widest measure of economic output, grew at an inflation-adjusted annual rate of 2.5% in the fourth quarter of last year and is widely expected to clock in at about 1.9% for the just-ended first quarter of 2007. (The Commerce Department will report its preliminary estimate of first-quarter GDP on Friday.)
The recent falloff in remittances reverses a long-standing trend in which a slowdown in Mexico's economy led to an uptick in remittance revenue as Mexicans migrated north to replace jobs lost at home, Morgan Stanley's chief Latin America economist Gray Newman says.
But with U.S. housing market slowing, that safety valve may close. "If continued, Mexico's consumers could find themselves with less of a shock absorber, which has helped smooth out business cycles in recent years," Mr. Newman wrote in a report last week.
Record low unemployment during the Clinton years helped draw undocumented Mexican workers, then mainly employed in agriculture, into construction and other service industries. With the housing boom, wage differentials, which used to favor farm work, started to tilt toward the building trades, attracting even more labor from Mexico.
Data showing what appear to be fewer illegal crossings at the U.S.-Mexico border adds to the evidence of a housing-related plunge in remittances. Apprehensions of attempted crossers are down just over 10% during the first quarter of this year from the same period in 2006, according to federal law enforcement. The Bush administration claims the decrease is because of tighter border security. But those on the Mexican side say traffic has slowed for a simpler reason: There are fewer jobs waiting for those who make it across.
The pain of a U.S. housing slump affects people such as Donato Diaz in the tiny village of Santa Gertrudis Zimatlan, in southern Oaxaca state. He returned from the U.S. in 2000 after spending more than a decade building homes in California's sprawling suburbs. Mr. Diaz used the money he made there to build his own construction-supply store. However, its fortunes depend heavily on cash transfers from Mexicans still working up north to family members here, who use the money to improve their homes.
Mr. Diaz's business is suffering now. In 2003, he says, he bought a dump truck to haul sand to construction sites. During the past few years, the truck made seven or eight deliveries a day. Now? "We do two loads a day," Mr. Diaz says with a sigh.
Between 2000 and 2006, almost 20,000 Hispanic laborers entered the U.S. construction work force in just one occupation: cement mason. Another 72,000 became drywall hangers and 140,000 more as painters, according to figures from the U.S. Bureau of Labor Statistics. The vast majority of these new job holders were foreign-born and crossed the border illegally, according to the Pew Hispanic Center in Washington.
As housing starts slow, recent hires on construction sites are the first to lose their jobs -- and the first to warn relatives back home not to bother with a risky border crossing until the job picture improves. How many Mexican workers have lost their jobs? Most immigrants send an average of $1,000 a month back home, and Mexico's remittances are down by about $600 million, representing earnings from about 600,000 workers.
Many of these workers rely on day-to-day employment through small, family-owned subcontractors, whose hirings and firings don't surface in overall job-loss statistics.
Trouble in the U.S. housing market could also affect other industries staffed by immigrant labor. The carpet industry, for instance, is dominated by various nationalities at different points in the chain: Many Mexican workers are employed in factories that make rugs, Central Americans dominate the carpet-installation business and Brazilians have carved out a niche in rug cleaning.
Little wonder, then, that remittances from the U.S. are dropping off almost everywhere in Latin America. Brazil received $330 million in remittances from the U.S. in February compared with about $446 million per month on average a year ago. Monthly remittances to Guatemala, which peaked last May at $361 million, dropped to $271 million in February.
The slowing housing market also weighs on remittances in other ways. U.S. homeowners are likely to compensate for rising mortgage payments by cutting back on services that employ large numbers of immigrants, such as housecleaning, landscaping and laundry. Homeowners may also cut out frills such as visits to restaurants and beauty salons, big employers of immigrants.
As Gordon Hanson, a labor economist at the University of California at San Diego puts it: "Among nonessential expenditures that higher mortgage payments might eliminate, getting the nails done might be at the top of the list."
Write to Joel Millman at firstname.lastname@example.org
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