MexECON Blog

May PMI Falls to 51.7

Mexico's May purchasing managers index (PMI) for the manufacturing sector fell to a seasonally-adjusted 51.7, after a revised reading of 54.0 in April.  The sharp reversal brought the index down to its lowest level since February.  According to the report, from Banco de México and the official statistics agency INEGI, the decline in May reflected decreases in three of the five subindexes.  Most important, the subindex on new orders dropped to 52.6 from a strong 56.1 in the previous month, while the subindex on production fell to 51.9 from 54.7.  Both those subindexes are now at their weakest since late 2009.  The subindex on inventories fell to 50.4, compared with 51.1 in April and 51.7 in March.  In contrast, the subindex on employment rose in May to 52.1 from 51.9 in April, and the subindex on supplier deliveries edged up to 50.5 from 50.4 in the previous month.

Comment:  The PMI is designed so that readings over 50 point to expanding activity.  The report for May therefore suggests Mexico's factory sector is still growing.  Nevertheless, the extraordinary monthly drop in May suggests there are some major problems brewing.  One obvious problem is the sudden slowdown in worldwide economic activity that has become apparent in recent weeks.  The worsening of the European debt crisis and the stall in U.S. hiring have probably already started to discourage new investment and delay other key economic decisions in Mexico.  Perhaps less obvious, managers may have become unsettled by the Mexican presidential campaign.  The latest polls have shown rising support for the leftist candidate, who advocates a more statist, interventionist economic policy.  If that support continues, the candidate could win the presidency when balloting takes place in July.  In sum, the weak reading in the May PMI may be an early indication that Mexico's economy is about to hit a series of economic and political speed bumps this summer.

Patrick Fearon, CFA
Vice President, Fund Management

PMI 1205

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