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.

A follow-up on Mexican consumer behavior

Extract of the article published on Plaza de Armas (http://www.plazadearmas.com.mx/), February 28^th 2011.

 This is a follow-up of my post published on November 16^th 2010.

At December 2010, retail sales had a 2.9% annual increase. The good news are that all the areas evaluated had an improvement during the year; the bad news are the existing gaps in different areas compared with 2008.

Dec. 2010 vs. June 2008 (Made with data from the Commercial establishments monthly survey, INEGI)
Retail establishments with growth		Retail establishments with decrease
Establishments	Change	Establishments	Change
Food, beverages and tobacco	13.8%	Home appliances, computers and articles for interiors decoration	-18.1%
Textile products, dressing accessories and footwear	6.9%	Motor vehicles, spare parts, fuel and lubricants	-11.6%
Supermarkets and department stores	4.6%	Stationery, recreation products and other personal-use products	-4.4%
Hardware and glass	1.7%	Health-care products	-4.1%

Although data shows improvement, consumers are still very sensitive to prices on their purchases. According to a study published by American Express, 68% of Mexicans make our purchases based on the cost (more than quality, and a lot more than the ecological impact of the products). This behavior is clearly identified by the big supermarket chains, as Walmart or Soriana, that are growing based on their low-investment and low-cost establishments (Bodega Aurrera Express, and Soriana Express).

The factor that Is having a clear influence on this behavior is employment. The national unemployment rate has been at levels of 4.9% to 5.7% on the last 6 months, way above the 2008 levels.

What is the outlook for 2011? There are three indicators that show a positive trend:

1. There are positive estimates of private consumption (where the families’ expense is included) according to International Monetary Fund (+4.7%) and Banco Santander (4.1%); that means it will be one of the motors for the estimated national economy growth.
2. Credit to consumers has had recently its biggest monthly increases in the last 3 years according to Central Bank (BANXICO) and the Banks and Securities National Commission (CNBV).
3. Consumer confidence is positive for 2011. TNS Research International identified in a recent study that optimism levels and intention to consume have increased for 2011. The confidence index calculated by INEGI had in January 2011 its second biggest level in the last 32 months, with good levels for those components that consider the economic perspectives for the next 12 months.

What are the risks? In the first instance, there are current inflationary pressures due to the increase on several commodities; the second risk is the slow rate in employment recovery we are having. Both issues can affect negatively the consumer’s behavior.

In brief, consumers begin to have more confidence and marginally more capacity to consume, what gives moderate growth perspectives with some uncertainties. Meanwhile, cost will be still an important factor in the purchasing decisions, so you will have to develop initiatives to reduce the cost of your product or service without compromising the basic quality elements that keep you competitive.

Consumer confidence is improving... but beware!

The Consumer Confidence Index, published by INEGI, has already a year with a growth trend. As in other analysis I have shared, these are good news, but let’s give it a little context.

The good news started by the end of 2008, beginning of 2009, when people felt that the economic situation at home and in the country was worse than a year before, but they also thought that it would improve in the following 12 months; this means people began to see the light at the end of the tunnel.

Later, by the end of 2009, people began to feel that the economic situation was already better than the previous year, at home as well as in the country; this increased consumer confidence.

However, there is another indicator within the index, that gives a different nuance: when people is asked about the chances to buy durable goods (home appliances, furniture, etc.), they show a lot more cautious attitude. In other words, people has each time more confidence on the economic situation, but not as much as to make big purchases. The result is that, although the positive trend, the confidence index is on its lowest levels of the last 10 years.

How has this confidence affected economic activity? Data shows that retail sales have almost reached the same level they had at the beginning of 2008, but with very uneven results. For example, there are sectors with sales levels superior to 2008:

·         Food, beverages and tobacco

·         Supermarkets and department stores

·         Textile products, dressing accessories and footwear

·         Health-care products

But, on the other hand, there are sectors that are below 2008 levels:

·         Stationery, recreation products and other personal-use products

·         Furniture, household equipment, computers and interior decoration articles: this sector is in the lowest levels of the last 10 years!

·         Hardware articles and glass

·         Motor vehicles, spare parts, fuel and lubricants

To summarize, consumers' reactivation is focused on sectors that cover basic needs (health, food, dressing), but the employment situation (analyzed previously, on http://beammx.blogspot.com/2010/11/employment-in-mexico-improvements-but.html) shows a weak market for durable goods. If your company or employment is on this sector, I suggest one of three ways:

1.       Adapt your offer to make it more affordable (financing, designs to make it cheaper without losing quality, etc.)

2.       Find specific niche markets that may have attractive dynamics

3.       Look outside domestic markets. A possibility is to think about emerging markets, with growth forecasts beyond 5%, and take advantage of trade agreements Mexico may have with them.