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.