Senator Eliot Shapleigh - El Paso, Texas

WASHINGTON -- The global recession has already infected Texas exporters. With the state's fortunes increasingly tied up with Mexico, the swine flu epidemic could further weaken the economy.

So far, the outbreak appears to have had a limited impact on Texas, driving down pork prices and worrying the travel industry as some airlines reduce flights to Mexico. But with Mexico predicting this week that the flu fallout will further squeeze its economy, the health scare is worrisome for a state that exported $62 billion of goods to Mexico last year.

"It is not good for Texas," said Eugenio Aleman, a Wells Fargo senior economist who monitors the Texas and Mexico economies. Overall, the risk is uncertain "because there is no possibility to know how long this is going to last or how efficient the [Mexican] government is going to be to contain this crisis."

Aleman and other economists said the impact on Texas could be small if the virus is contained and may ultimately be indistinguishable from the symptoms of the recession. The value of Texas exports has already dropped about 20 percent in 2009, from a year earlier.

Texas' border cities are most likely to experience the economic side effects, as fewer Mexicans cross the border to shop. If the peso drops in value, it would further dent South Texas' retail sector, Aleman said.

"The border economy is highly integrated with Mexico, and any economic weakness in Mexico affects the border disproportionately," said Anil Kumar, an economist at the Federal Reserve Bank of Dallas.

Aleman said Friday that he expects the flu, also called H1N1, to shrink Mexico's economy about 0.6 percent this year, with total contraction of about 5 percent in 2009. Wells Fargo expects Mexican exports to shrink 13 percent, driven by lower U.S. demand for light-duty trucks produced south of the border.

Unlike other states that have boosted trade with Asia, Texas remains dependent on Mexico as a partner. Exports to Mexico accounted for 32 percent of foreign sales in 2008, according to the U.S. Census Bureau. Canada was the second-leading destination for Texas goods, accounting for 10 percent of exports. Only 4 percent of Texas exports went to China.

"We should expect that Texas exports will be negatively impacted by the economy in Mexico, if it weakens considerably due to the flu," Kumar said.

Aleman said North Texas is unlikely to lose much as a result of swine flu unless "the epidemic continues and gets worse." In that case, travelers may avoid the region and local consumers might avoid malls and other congested places.

"Anything that has to do with any gathering of people is going to be severely affected," he said.

The World Health Organization said H1N1 was close to becoming a pandemic, indicating that the disease has spread across several countries.

Several studies have tried to predict the impact of a pandemic on the economy. The Congressional Budget Office estimated that a mild pandemic could reduce U.S. GDP by 1 percent, while a severe influenza pandemic could shrink American output by 4.25 percent.

"The serious additional hit, beyond what the financial crisis is doing, would only come if we or Mexico put on pretty severe quarantine measures that impact truck drivers," said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. "And I think we are a ways away from that."