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Dallas Fed examines natural gas prices, China's economic power, Social Security reform and Mexican GDP reporting

For immediate release: September 29, 2003

DALLAS—The latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy examines rising natural gas prices, China’s economic growth, the price of Social Security reform and difficulties in interpreting Mexico’s GDP data.

In “U.S. Natural Gas Prices Heat Up,” energy economist Stephen Brown finds that natural gas prices are likely to remain elevated for several years and further development of gas resources and infrastructure are necessary to meet growing demand.

Prices have risen recently due to colder-than-normal winters and greater demand from industry. This demand will continue because gas is considered more environmentally desirable than other fuels.

“Opponents of new development are concerned about environmental consequences and see energy conservation as a potential solution to the looming problems in natural gas markets,” Brown writes. “A substantial body of research suggests that such conservation is likely to have economic costs at least as high as elevated energy prices and probably higher.”

Brown states that while the elevated price of natural gas will create a drag on the economy, it is unlikely to derail the nation’s recovery.

In “China: Awakening Giant,” senior vice president and chief economist Mike Cox and economist Jahyeong Koo write that the Asian nation may grow to the world’s largest economy in 12 years and other countries will benefit from this tremendous growth.

Among China’s strengths is its huge labor force—six times larger than America’s—a resource that's fueling an expansion of China’s manufacturing industry. China is now one of the leading exporters of manufactured goods to the United States.

China's transformation has several economic benefits, according to the authors. “As China exports more of what it produces, it will import more of what it consumes, creating a huge market for foreign producers,” Cox and Koo write. China's manufacturing output also has held down world inflation by producing more goods, more cheaply.

Cox and Koo are optimistic that China will continue to move up the economic ladder. “And as China grows, the world will be a richer place as well,” they state.

In “Social Security Restructuring: Tough Decisions Ahead,” senior economist Jason Saving and senior economist and policy advisor Alan Viard describe the trade-offs the country faces in deciding whether to overhaul the Social Security system.

Social Security is a pay-as-you-go system in which workers' taxes are used to pay their parents' benefits rather than being invested, the authors explain. This system gave past retirees very high returns, but it offers many current and future workers below-market returns. It also has created a $10 trillion unfunded liability that Americans, present or future, must pay.

The authors show that moving away from a pay-as-you-go system would raise the retirement income of future generations but would require current generations to accept even lower returns. Retaining the present system would let current generations avoid this sacrifice but would impose below-market returns on future generations in perpetuity. This is the difficult choice citizens and policymakers now face.

In “(Mis)reporting Mexico’s Gross Domestic Product,” Franklin Berger, technical support and data analysis director, argues that Mexico’s quarterly GDP is often misinterpreted in news stories, partly due to the so-called Easter bias.

“A year-to-year comparison in which Easter does not occur in the same quarter in both years will produce an unreliable estimate of true economic growth,” Berger states.

In May, Mexico began issuing seasonally adjusted GDP data, removing the Easter bias. The new data are more useful because they allow for unbiased calculation of year-over-year growth and also allow meaningful quarter-to-quarter comparisons.

Find the September/October issue of Southwest Economy online at


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James Hoard
Phone: (214) 922-5307