MexECON Blog

Autos Driving Mexican Export Boom

Since bottoming out in the first quarter of 2009, the Mexican economy has been in a strong recovery.  Gross domestic product (GDP) has increased in four of the last five quarters, and in the second quarter of 2010, GDP was up a robust 7.6% from the same period one year earlier.  As has been stated often on this blog, the Mexican recovery has stemmed primarily from rapidly rising exports, which have boosted industrial activity and spurred hiring.  In fact, the rise in exports has been extraordinarily strong compared with previous cycles.  For example, Mexican exports in May 2010 were up an astounding 43.1% from their trough one year earlier (measured in dollars and without seasonal adjustments).  In contrast, exports were up just 7.4% in the first twelve months of Mexico's 2001-2002 rebound.

A key question is why Mexico's current export boom has been so strong, and what does it imply for the future of the Mexican economy?  The official Mexican trade statistics do not provide enough detail to answer these questions, but a recent analysis of data from the U.S. Census Bureau shows the current Mexican export boom has come mostly from transportation equipment, i.e., trucks, autos, and auto parts.  The data indicate that in the first half of 2010, U.S. imports of Mexican transportation equipment were up a whopping 86.7% from the same period one year earlier, or more than twice the rate of increase for all imports from Mexico.  In fact, the growth in transportation equipment accounted for 38.5% of the entire increase in imports from Mexico.  The second-biggest contributor was computers and electronic products.  Imports of those goods from Mexico were up just 28.8% year-over-year, accounting for a mere 17.8% of the total increase.  Although most categories of imports from Mexico showed big increases, none contributed nearly as much growth as transportation equipment.

To understand the big rise in U.S. demand for Mexican trucks, autos, and auto parts, it is important to review what has been happening in the U.S. auto market in general.  According to Ward's Automotive, U.S. light vehicle sales fell for a fourth straight year in 2009, plunging 21.4% to an annual rate of just 10.6 million units.  That was the weakest selling rate since 1982.  With sales falling off a cliff, dealers cut inventories, and producers slashed production.  By 2010, however, the U.S. auto market was in recovery.  Based on a range of analytical reports and a talk with Gary Thayer, Chief Macro Strategist at Wells Fargo Advisors and former Chief Economist at A.G. Edwards, it appears that the rebound in the U.S. auto market has come from a modest improvement in the availability of financing and an aging of the fleet (more and more autos are getting so old they must be replaced).  Data from Ward's shows that in the first eight months of 2010, U.S. auto sales were up 8.4% from the same period one year earlier.  Just as important, U.S. auto inventories in August 2010 stood at 52 days of sales, versus just 29 days of sales in August 2009.  These figures go hand-in-hand with Ward's data showing that in January through July 2010, U.S. light vehicle production was up 64.5% year-over-year, while Mexican light vehicle production was up 75.5%.

Comment:  The analysis shows that Mexico's current economic recovery is ultimately based, in large part, on rising exports of trucks, autos, and auto parts to the United States.  That means that the recovery is fragile and overly concentrated.  The dependence on the auto sector helps explain why the strong growth shown in Mexico's official statistics is not readily apparent in much of Mexico (including in the areas close to Terra Nova's portfolio companies).  The risk is that U.S. auto sales could slow and the process of rebuilding U.S. auto inventories could come to an end before Mexico's non-export sectors are growing fast enough to take up the slack.  Nevertheless, the analysis suggests there may be some room for optimism.  The aging of the U.S. auto fleet and improved financing terms suggest sales north of the boarder could keep rising in spite of joblessness and tepid business demand.  That is especially true given that U.S. auto sales would still have to rise substantially just to get back to the 10-year average annual rate of 16.2 million units.  Finally, inventory levels have a bit farther to rise before they would be at preferred levels.  Therefore, even though Mexico's economic recovery is uncomfortably dependent on auto exports, the end of the recovery is not necessarily imminent.

Patrick Fearon, CFA
Vice President, Fund Management

                                                  U.S. Imports From Mexico, 2009-2010
                                      Thousands of  U.S. Dollars, Not Seasonally Adjusted
                                                        Source:  U.S. Census Bureau
Autos Driving Mexican Export Rebound

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