After a decade of stagnation, New Mexico has experienced strong economic growth, mostly due to energy production, government research and international trade. Now, growing revenues are giving the state an opportunity to invest in long-run growth by tackling persistent poverty, an undereducated labor force and a lack of economic diversification.
Source: Federal Reserve Bank of Dallas
By Robert Leigh, Laila Assanie and Isabel Brizuela
December 04, 2024
New Mexico is the nation’s second-largest oil and gas producer (behind Texas). It is the home to cutting-edge federal research and houses a busy port of entry through which a growing volume of goods passes from Mexico, the nation’s No. 1 trade partner.
Yet, New Mexico’s economy has historically lagged other Southwest economies and the nation. It ranks low in household income and educational attainment, and its population has little changed over the past decade, while the populations in neighboring Texas and Arizona have boomed.
However, 2023 highlighted the state’s considerable upside. New Mexico achieved solid economic growth in part due to a booming energy sector and trade with Mexico.
State builds on a noteworthy 2023
New Mexico’s economy, measured by GDP, notably expanded last year. State output grew 6.8 percent, outpacing the nation’s 2.9 percent increase (Chart 1). Much of this growth was attributable to the burgeoning energy industry. Mining contributed 4.2 percentage points to the New Mexico state GDP in 2023.
This is in stark contrast to the sluggish growth persistent through most of the 2010s. Notably, New Mexico’s annual GDP growth averaged 1.0 percent from 2010 through 2022, lagging the nation as a whole, which expanded 2.3 percent annually. By comparison, Texas’ annual GDP growth was 3.3 percent and Arizona’s was 3.1 percent during that period.
Despite the recent gains, the state’s economic output remains relatively small. New Mexico’s GDP was $135 billion in 2023, compared with $2.6 trillion in Texas. Even with record-high levels of energy production, economic growth has cooled slightly this year, though oil price volatility can distortmeasurement of the value of state-level real (inflation-adjusted) GDP.
Slow job growth rate, sparse population pose challenges
New Mexico is the fifth-largest state by land area, with 121,697 square miles. It is also one of the least-populated states. The economy has long faced significant structural challenges. The state labor market is relatively small, with just 888,000 on nonfarm payrolls, a fraction of the 14.2 million jobs in Texas. The state’s annual job growth rate of 0.7 percent from 2010 through 2019—compared with 2.3 percent for Texas—has historically trailed the nation (Chart 2).
This sluggish pace reflects a lack of economic diversity and investment, as well as reliance on government and tourism jobs.
New Mexico had 2.1 million residents in 2023. The state’s population grew just 2.3 percent from 2010 to 2023, compared with the nation’s increase of 8.3 percent (Chart 3). The state has experienced both domestic outmigration and slow natural increase (births minus deaths). More New Mexicans have left the state than new residents have arrived every year since 2012, with the exception of 2020.
New Mexico’s stagnant population and socioeconomic issues, such as low educational attainment and high poverty rates, pose additional constraints. The state’s labor force participation rate of 57.5 percent in August 2024 is below its neighbors—Texas (64.4 percent) and Arizona (62.3 percent). However, Texas and New Mexico unemployment rates were identical, 4.1 percent, in August.
Additionally, Texas and Arizona attract businesses more readily than New Mexico, reflecting the benefits of their strong and diverse business sectors. New Mexico ranks in the middle of the pack in business tax climate at No. 23, according to the Washington, D.C.-based think tank the Tax Foundation. That is less favorable than Texas at No.13 and Arizona at No.14.
Educational attainment also presents a challenge to workforce development. While the share of the population 25 years and older with a high school diploma or a college degree has gradually increased in the past 10 years, the state trailed the U.S. In 2023, 31.6 percent of New Mexico’s population 25 years and older had a bachelor’s degree or higher versus 36.2 percent of the U.S.’s population.
Median household income in 2023 was $60,980 compared with $80,610 nationally. Nearly one-fifth of New Mexicans (17.8 percent) lived in poverty in 2023, according to American Community Survey data. The state also has a higher rate of food insecurity relative to the nation.
Roughly 10 percent of the state is Native American, including a portion of the Navajo Nation, which extends across the Four Corners region into Arizona and Utah and operates as a sovereign nation with its own separate administrative structure. Indigenous peoples have some of the highest poverty rates in the state at 30.5 percent. Those living on tribal land often confront poorly developed infrastructure and little economic growth.
Energy fuels economic expansion
Challenging the state’s sluggish past, the energy sector has led the recent turnaround in state output. Mining has long been a major industry in New Mexico. Miners historically sought out precious metals as well as fuel resources, such as coal and uranium. More recently, hydraulic fracturing and the shale oil revolution have made the state a leader in fossil fuels production.
The once-quiet, southeast corner of New Mexico is now dotted with rigs tapping into the Delaware Basin—a subsection of the Permian Basin. The Delaware’s geology makes it far more productive than others, though it can also be more difficult to drill there. Technological and efficiency improvements have allowed production to accelerate.
The state’s crude oil production doubled from 2019 through 2023, while production of natural gas rose 79 percent (Chart 4).
On an absolute basis, annual oil production increased 0.9 million barrels per day in New Mexico, compared with a rise of 0.4 million barrels per day in Texas. Overall oil and gas output in Texas is about three times that of New Mexico. The production gains have come despite regulatory oversight that is somewhat more stringent than in Texas (such as regulation of gas flaring at well sites).
The state budget has grown accordingly. New Mexico collected $11.5 billion in revenue from oil and gas through a combination of taxes and land income for fiscal 2023 (12 months ended June 30, 2023), with an additional $1 billion going to local governments.
Direct collections from oil and gas made up 20 percent of the state’s revenue for the general fund during the recent period and are expected to increase to 23 percent by fiscal 2025. The combination of direct and indirect collections from oil and gas brought contributions to the general fund to 35 percent in fiscal 2023.
The state has used the additional revenue to expand its operating budget, fund capital projects and increase monies to state investment accounts.
Reflecting energy growth, mining sector employment grew 5.3 percent from December 2022 through June 2024. However, the pace has recently ebbed as the industry returned to prepandemic employment levels. Moreover, growing efficiency in the oil field and consolidation of energy companies will likely keep job gains subdued in the long run.
Increasing cross-border commerce
New Mexico has also benefited from expanding trade with Mexico and congested ports of entry in El Paso. U.S. trade tensions with China and the United States–Mexico–Canada Agreement have favored relocating some manufacturing and supply chains to Mexico, which became the top U.S. trading partner in 2023. The upturn in activity generated more traffic at the Santa Teresa Port of Entry, an approximately 30-minute drive from downtown El Paso.
Top imports through Santa Teresa in 2023 were electronics and machinery, including computers, engines, wires and cables, telephones and medical instruments. The value of trade transported through Santa Teresa totaled $27.6 billion, still a fraction of the amount handled in the Texas portion of the El Paso district, $100.1 billion, and, thus, susceptible to wider year-to-year swings in activity (Chart 5).
While cross-border manufacturing relationships—maquiladora manufacturing in Mexico and logistics and warehousing in the U.S.—benefit the entire El Paso trade district, bottlenecks in El Paso have specially affected Santa Teresa.
Three recently expanded industrial parks buoy the port of entry. The Santa Teresa complex supported just over 7,000 jobs and contributed around $2 billion to the state’s economy in 2023, according to an economic impact study from the Arrowhead Center at New Mexico State University.This is significantly higher than in 2020, when the complex accounted for slightly fewer than 5,000 jobs and an economic contribution of about $960 million. However, there are local concerns that electric grid capacity, water availability and poor internet infrastructure could constrain further expansion.
While activity at the port is modest relative to other border entry points, New Mexico has an opportunity to capitalize on nearshoring as a logistics and manufacturing location. Success hinges on the state’s capacity to provide needed infrastructure, labor and cost advantages to attract and support business.
Energy, science and government historically support job growth
New Mexico has been a hub for federally funded scientific research since the Manhattan Project, which produced nuclear weapons during World War II. Work continues at the Sandia and Los Alamos National Laboratories as well as at Spaceport America near Las Cruces, a launch facility backed by state and local government.
New Mexico led the nation in research and development (R&D) value-added as a share of state GDP in 2021, according to recent data from the Bureau of Economic Analysis. R&D value-added exceeded an estimated $7 billion in 2021, and R&D employment accounted for nearly 36,000 jobs. Most R&D jobs can be found in the professional and business services sector, which expanded 4.2 percent from December 2022 through June 2024 (Chart 6).
In 2023 and through the first half of 2024, New Mexico payroll employment growth outpaced the nation. Many of the fast-growing sectors are also made up of relatively well-paying jobs. Professional and business services’ average hourly earnings were $35.71 in August 2024, about 26 percent higher than average private industry earnings in the state.
Government was the state’s second-fastest-growing employment sector from December 2022 through June 2024, expanding 6.0 percent. Relative to Texas and the nation, New Mexico has an outsized share of government employment.
Using energy proceeds to aid state expansion
While New Mexico continues to navigate economic and demographic challenges, increased revenues from oil and gas production provide opportunities to invest in education, infrastructure and other improvements to boost long-term growth.
Recent budget surpluses have funded higher pay for teachers and school meals and provided support for low-income families through tax rebates and child tax credits. The state is also offering free tuition for New Mexico residents at state-funded colleges and is piloting a guaranteed income program.
Legalization of recreational marijuana in 2021 has provided an additional revenue source. The state has more than 1,000 dispensaries, where sales totaled $37.1 million in October 2024. Fiscal 2023 revenue totaled $24.5 million from the cannabis excise tax (up from $5.1 million in fiscal 2022), almost as much as from the excise tax on liquor.
Attracting private investment and creating more well-paying jobs is key to sustaining growth, as is retaining and growing the workforce. There are positive signs, including professional and business services employment growth and increased investments in and around the Santa Teresa Port of Entry.
Advanced infrastructure is a key factor for firm relocation or expansion. The state ranks 10th worst for internet availability and 5th worst nationally for internet speed, which are essential for workers and firms to connect to global markets.
Revenues from a booming oil and gas industry provide New Mexico with the opportunity to enhance its competitiveness. Longer term, the state confronts a stagnant population, persistent poverty and education challenges that complicate economic diversification efforts.
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About the authors
Robert Leigh is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.
Laila Assanie is a senior business economist in the Research Department of the Federal Reserve Bank of Dallas.
Isabel Brizuela is a business economist in the El Paso Branch of the Federal Reserve Bank of Dallas.
The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
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