A view to the economic health of the United States

Published in Plaza de Armas (www.plazadearmas.com.mx), April 4th 2011.

Yes, we all know the saying “if US has cold, Mexico gets pneumonia”. In an economic dynamic where United States is the destiny for 80% of Mexico’s exports, the origin of 30% of Foreign Direct Investment in the last year, the main source of international tourism to our country (we are their main destiny abroad), as well as the main destination of Mexican human capital, legal and illegal, the dependence is unavoidable.

In the next graph we can see the relation between both economies in the last 3 years. To make both economies comparable, I converted them to an index where 2007 4^th Quarter’s GDP is equal to 100 (previous to the economic crisis). The Mexican GDP delayed its contraction compared with US, but the fall was harder and the recovery slower. That’s why we keep the continuous concern and interest on the situation and perspectives of United States’ economy.

Made by Atalaya, with data from Bureau of Economic Analysis and INEGI.

We can also see on the graph that the most recent 6 quarters of recovery in US have made it recover the GDP level previous to the crisis. This trend will always be good news, but we can’t say that the effects of the economic crisis have been a totally recovered.

In this period, US population grew more than 10 million people, and of those, 5.7 million is 16 years or older, and therefore, they are potential labor. In plain terms, they are producing the same amount of goods and services, but with more people. This has caused that some key indicators have not completely recovered yet, as employment and income levels.

Their unemployment rate reported in March is 8.8%. There are two good news: it is the lowest level of the last two years, and it had a strong recovery in 2011 1^st quarter; the bad one is that it is still very high compared with the levels previous to the crisis, that were in the range of 4.5% to 5%.

As a consequence, the average income level is not recovered yet. According to the US Bureau of Economic Analysis, this variable has been fluctuating in the last 2 years, and is still slightly below the highest level it had in 2008.

This panorama, linked to other external and internal factors, produces a mix of encountered signals about their economy that we receive daily.

On one hand, there are positive perspectives in some parameters, as the increase in factory orders that are in the highest level since September 2006 or the increase in the credit for consumption that allows more loans for important expenses (purchases of cars, boats, college education, etc.) with a fall in credit card balances. But on the other hand, people has still different uncertainties about the future (the confidence index fell in March after it had reached its highest level in the last 3 years), inflation is having its highest level in the last year and a half, and the real state market has different big issues ahead (house prices is still falling, and many families still have mortgage problems that may lead to different foreclosures). In addition, the US Government is negotiating strong cuts to the public expenses, which can be positive in the long term due to the high deficit levels they have, but in the short term may strongly compromise the growing rate.

It is normal to be nervous after all the things we’ve been through in the last 3 years. As soon as we hear about a risk in the economic environment, we fear its consequences in a delicate state of recovery. But let’s not forget that in any moment, we may have risks but we also have opportunities. Reality shows us that although we have been hearing about a double-dip risk for the last year, US has concatenated 6 quarters of growth and keeps positive perspectives for 2011. Therefore, we must always keep visible the positive and negative forces we must monitor, evaluate and analyze; I list here those I consider the most relevant for the moment.

The economic performance of each State in Mexico

I published this article on Plaza de Armas, newspaper from Queretaro, February 14th, 2011 (http://www.plazadearmas.com.mx/)

To complete this analysis about the ups and downs of Mexico’s economic fall and recovery, let’s analyze from the perspective of each State performance.

I will make this analysis with data for 2009, since GDP’s data for 2010 by State is still unavailable. However, this figures let us understand the impact of the recent financial crisis.

The economic crisis was of different magnitude for each State, depending on the composition of their economic sectors.

We can see that the northern border States, that depend heavily on commerce and manufacturing, had falls from 9% to 12%. On the other hand, most of the States on the Pacific coast had milder falls (between 2% and 5%), mainly because they have a strong primary sector (agriculture, cattle, fishing, forestry) that kept its level or improved it during 2009.

Only 4 States had a growth during 2009, and all of them driven by different reasons: Baja California Sur was pushed by an impressive growth in the construction sector, Tabasco by oil activities, Zacatecas by commerce and the primary sector, and Morelos, that kept almost the same economic level than 2008.

In the Central region, the States had falls of different magnitude. Meanwhile Puebla had a fall of almost 9% (caused mainly by the machinery and equipment sector, and commerce), Guanajuato’s fall was of 4% (driven by the machinery and equipment sector, and the foods, beverages and tobacco sector).

Referring to Querétaro, during the period 2003-2008 it was the State with the second biggest growth in the country (35.8%), driven by the growth in three main sectors: commerce sector, transportation, couriers and storage services, and construction. However, these same sectors fell from 8% to 15% during 2009, resulting in the tenth biggest fall of the States, and its GDP went back to 2007 levels.

Practically, every economic sector had growth during 2010; therefore, all the States that had a fall below 5% in 2009 may have already recovered during 2010, and if the trends remain, the rest of the States will do it during 2011 and 2012.

This detailed understanding of the country’s economic outlook is useful to have a better evaluation of business opportunities. If you make evaluations based only in perceptions, or with general data, you can outlook opportunities or have unrealistic expectations.

Mexico’s productive sectors economic reality

I published this article on Plaza de Armas, newspaper from Queretaro, January 31^st 2011 (http://www.plazadearmas.com.mx/)

Last week I mentioned that according to the latest economic growth data, Mexico has reached the same GDP levels than before the crisis (first quarter 2008). At a high level, these are definitely good news to keep the growing trend, but there are also elements that show that the negative effects of the economic crisis have not been completely overcome yet.

Let’s analyze the country’s economic sectors to identify which have grown, and which have still gaps to be closed. I’ll take as reference points 2010 1^stQ and 2008 3^rdQ.

The three sectors with the biggest setbacks are:

1. Construction: its GDP is 9.2% below 2008 level. The good news are that this sector stopped its contraction on 2009 4^thQ, and it had a 1.9% growth during 2010 first 3 quarters. Perspectives are favorable for 2011, but not enough to close the gap.
2. Lodging, food and beverage services: this sector is 6.7% below 2008 level. After a strong fall that had its lowest level on 2009 2^ndQ (caused by the economic crisis and the swine influenza alarm), it has had a 12.5% growth since then. Official figures about currency flow shows that 2010 was a better year than 2009 for foreign tourism, but still below 2008 peak. Perspectives are also favorable since insecurity is affecting on the destinations chosen more than on the total volume of tourists; local tourism is still an unresolved matter sin the domestic market is still weak.
3. Professional, scientific and technical services: a sector still 4.9% below 2008 level. Its fall was less dramatic, but its recovery is also slower; it started by the end of 2010.

On the other hand, there are sectors that have had a growth since 2008, and that practically didn’t have a setback on these three years.

1. Government and international organisms activities: it refers to the services offered by Mexican government (education, health, recreational, cultural, etc.), and diplomatic relationships, economic support, technological, commercial programs, etc. from international organisms. This sector has grown 10.1% and reflects the government role (as in all the world) to ease the economic crisis.
2. Media information: considers printed and electronic media. This sector is 8.3% bigger than in 2008.
3. Agriculture, cattle, forestry, fishing and hunting: this sector covers all the primary activities. The sector has grown 7.4%. Although it had been relatively stable during most of the period analyzed, it had an important growth on the last semester due to a positive performance from agricultural products and cattle.

This analysis allows having a better understanding of the different economic recovery nuances, and therefore helps to identify business opportunities and potential risks. Next week I’ll analyze economic performance by states to complete the understanding of the current economic situation.

GDP comparison for the rest of economic sectors, 2010 3rdQ vs. 2008 1stQ (2003 pesos, seasonally adjusted). Elaborated with data from INEGI.
Sectors with regression		Sectors with growth
Sector	Change	Sector	Change
Commerce	-3.6%	Educational services	6.2%
Business support and waste handling services	-3.5%	Corporate	4.7%
Recreational, cultural and sports services	-2.8%	Electricity, water and gas supply to final consumer	2.6%
Manufacturing industries	-2.3%	Real state, and rent of tangible and intangible assets	2.3%
Transportation, post and courier services, and warehousing	-1.4%	Other services except government activities	1.3%
Financial and insurance services	-1.2%	Health services	0.7%
Mining	-0.3%

2010 Mexico’s GDP: recovery and current situation

I published this article on Plaza de Armas, newspaper from Queretaro, January 24^th 2011 (http://www.plazadearmas.com.mx/)

During December and January there have been different estimates about the economic growth for Mexico during 2010. These goes from 5% to 5.4%, all of them are figures that exceed the previous forecasts from different organizations.

Definitely, a year with this growth rate will always be good news; but it is also important to put it in context to clearly understand the country’s situation. According to INEGI, 2010 3^rdQ is still a little below the level we had prior to the world economic crisis (2008 1^stQ). That means we are just reaching the point we were three years ago!

 

Elaborated with data from INEGI

Base 100=2008 1st Q

This information could make us believe that 3 years later, we have finally overcome the economic crisis pot hole. However, let’s consider that although the production level is the same, we are now more Mexicans than 3 years ago (2 millions more according to INEGI). As a result, the GDP per capita of 2010 is still 2.8% below the 2008 1^stQ. The GDP per capita is used as a proxy for wages in a country; therefore, according to this perspective, we are still living the effects of the 2008 crisis.

¿What expectations are for 2011? Forecasts are that the growth will be between 3.6% and 4.8%. If forecasts come true, we will recover the same GDP per capita sometime during 2011.

Institution	2011 Forecast
CEPAL	Above 3.5%
World Bank	3.6%
Ministry of Economy	4%
UBS Brokerage	4.3%
Banamex	4.8%

We are having a positive perspective. True, the crisis will have 3.5 to 4 years to have a complete recovery if we consider the indicator of GDP per capita, but it is good to know that the fears of a double-dip have disappeared.

Mexico’s challenges are still on different areas: a weak domestic market; a huge exports concentration in the United States; the existence of different economic sectors with production levels below those of 2008; insecurity and its effect on the economy; financial and fiscal risks on different countries; uncertainty regarding the currency policies from emerging markets, etc. However, it is important to plan over the positive perspectives, and keep a track of these risks to respond opportunely. I agree with a statement from the United States Chamber of Commerce, let’s be “cautiously optimistic” and begin to design our companies’ strategies according to these encouraging scenarios.

Mexico’s GDP forecasts: threats and opportunities, wishes and realities

Mexico is recovering from its worst economic setback in the last 80 years. After a GDP decrease of 6.5% in 2009, the most recent forecasts estimate  a 5% increase for 2010. This forecast has been increased during the 2^nd semester of 2010, and shows the thrust received by exports to the United States.

This growth allows reaching, by the end of 2010 or beginning of 2011, the same GDP that Mexico had on 2008 first quarter (at constant currency); it means that the crises caused the loss of 3 years of economic activity! And regarding GDP per capita, it will recover around 2013 according to World Bank’s statistics.

The economic sectors with more growth in the last year have been commerce, manufacturing, educational services, and lodging, food and beverages services. However, neither has reached 2008 levels.

On the other hand, there are sectors still shrinking in the last year, such as construction, professional, scientific and technical services, and health and social assistance services.

The only sector that did not have any contraction on these two and a half years was information on media, which comprises printed and electronic media.

What are the expectations for 2011? For the World,  as well as for Latin America, projections are that there will be a growth, but slower than 2010. For Mexico, the most recent forecasts are between 3.5% and 3.9%. The forecasts have been decreased during the year, mainly because the expectations for an economy expansion in the United States have been reduced (they are now between 2.3% and 2.6%).

These projections present a scenario with caution and risks for the next year. Mexico will keep a great dependence on United States’ recovery, and the growth rate will make employment and income recoveries something that won’t happen before 2 to 3 years. But there will also be economic sectors with very interesting growth rates, so it will be important to keep a tracking of the environment to identify these opportunities.