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.

Understanding the businesses’ profile in Queretaro

Published on Plaza de Armas, newspaper from Queretaro, February 21st 2011. (www.plazadearmas.com.mx)

During the last year and the beginning of this, we’ve heard a lot about the arrival of new investments to Queretaro from big companies, mainly focused in the aerospace industry: Bombardier with a factory for planes, Safran with 2 factories for plane’s components, DHL with its new hub at Intercontinental Airport, General Electric’s Engineering Center inaugurated last week, and plans for installing the first biotechnology cluster as well as talks with Sikorsky United Technologies to install a plant for helicopters, just to mention a few.

Definitely, these are good news, and the results are that Queretaro practically recovered from the 2009 fall, according to preliminary figures.

But let’s make a detailed analysis of the different characteristics of the businesses present in the State, and what opportunities they create. The most recent figures are from 2009 Economic Census, and it establishes the presence of more than 56,300 economic units from the private sector and government’s partially-owned companies, that bought 232 billion pesos in goods and services during 2008 (an economic unit is an organization dedicated mainly to one kind of activity on permanent facilities).

Half of that purchases concentrates on almost 250 organizations that belong to 2 big sectors: the manufacturing sector (mainly those companies with more than 100 people in the  transportation equipment building industry, food industry and chemistry industry), and in the wholesale commerce sector, with a big concentration in the raw materials industry for agricultural, forestry and industry. In other words, only 0.4% of the economic units represent 50% of the consumption of goods and services in the State!

This high level of concentration makes these organizations very attractive due to the high volumes of goods and services they buy; but these are also organizations with strong negotiation leverage, and lots of suppliers at their doors, that generates a very competitive dynamic for which you must have a clear differentiation strategy.

But, let’s not forget about the rest of businesses that still have the need of 100 billion pesos in goods and services that someone must deliver. It is definitely a complicated segment due to its pulverization and, very probably, low institutionalization levels (86% of the economic units in the State have 5 people or less), but you can establish niche strategies to facilitate the delivery and you can have a better negotiation position.

You must work to have a clear understanding and evaluation of your potential markets, with the purpose to identify the opportunities and how to seize them. This will allow you to be effective in your commercial efforts and to develop the right strategies.

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%

2011 Mexico's economic outlook

As natural on this period of the year, it is important to take a peek to the economic forecasts for the next year. I will analyze it considering three macroeconomic variables: GDP, inflation and exchange rate.

1.       GDP: as I mentioned on my note “Mexico’s GDP forecasts: threats and opportunities, wishes and realities” (http://beammx.blogspot.com/2010/11/mexicos-gdp-forecasts-threats-and.html), perspectives for the next year were between 3.5% and 3.9% in November. This forecast, lower than the results for 2010, is very influenced by the forecasts of USA’s economy. Since I published that note, the result for America’s economy on the third quarter of the year has exceeded expectations, and that may bring an increase on Mexico’s projections (private analysts consulted by Mexico’s Central Bank, BANXICO, increased on December their estimate to 3.59%), although there have been other voices, more conservative (a researcher from Tecnológico de Monterrey estimates an increase of 2.5%, and Moody’s estimates it will be between 3% and 3.5%).

2.       Inflation: on November, this is 4.32% according to BANXICO (compared with November 2009). Although it has increased on the second semester due to changes on agricultural produces and on electricity, BANXICO and analysts’ perspectives are a decrease for inflation (BANXICO estimates it will be 3% +/-1% for 2011 3^rd quarter, and International Monetary Fund estimated it will be 3%). Although the private analysts consulted by BANXICO made a recent adjustment to increase it (from 3.77% to 3.82%), it generally seems that the weak domestic market (“Employment in Mexico: improvements, but still a long way to go”, http://beammx.blogspot.com/2010/11/employment-in-mexico-improvements-but.html) won’t put inflationary pressures to the national economy.

3.       Exchange rate: since February 2010, it has been practically all the time on the range of 12.30 to 13.00 pesos per dollar, and the perspectives are it will keep that way. This outlook represents stability, but may compromise exports competitiveness.

So far, the projections sounds encouraging: PIB projections have been slightly increased (with some warning voices), inflation appears to be less than this year (with some recent increases), and the exchange rate seems to be relatively stable. It looks like a positive scenario, but not extremely optimistic. There are several world issues that must be closely followed since they may have a significant impact on these indicators:

·         The magnitude of America and some European countries governments’ debt.

·         The risk of “overheating” of some emerging economies, as China and Brazil.

·         Different governments decisions regarding their currencies in order to stimulate their international trade.

Plan over positive scenarios (if you are too conservative, other will take the opportunities that will arise), but let’s have clear that the country won’t recover 100% in all its sectors during 2011, and there are different economic issues showing a fragile world, so it will be convenient to be prudent and continuously monitor the variables mentioned above to timely identify possible changes in trends.