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