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September 19, 2008

Mexico and US Industrial Production: Joined at the Hip
by Bryan Crowe

Today's announced -1.04% yoy contraction of Mexican industrial production (IP) for July comes as no surprise. This reading follows previous slips of -0.35% in June and -0.44% in May. After the US's yoy decline in IP in July (-0.4%) and in August (-1.5%), our southern neighbor's activity was bound to follow suit because of our mutual deep manufacturing integration. Mexico is the not only the origin of many lower-value consumer goods destined for the US, but also it produces many integral parts for durable and capital goods finished in the United States. In fact, a whopping 82% of Mexico's total exports last year went to the US. Thus, as US IP slips (for example, lower automobile output as we are seeing today), demand for said inputs also falters, and Mexican manufacturing skids to a halt (i.e. no more muffler smelting).

Chart 1

Now, a mutual slowdown in IP such as this would not be a problem if one-quarter of Mexico's economy was not industry-based. But it is. In sum, when one-quarter of your economy is contracting at present, you'd better hope for a bumper crop of either maize or tourists. (Shaded area is Mexican recession.)

Chart 2

Bryan Crowe
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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