MexECON Blog

June PMI Falls to 51.4

Mexico's June purchasing managers index for the manufacturing sector fell to a seasonally-adjusted 51.4.  That was much lower than the revised 52.6 in May, and it was the PMI's lowest reading since September 2010.  The decline in June came in large part from a sharp fall in the heavily-weighted subindex on new orders.  That subindex fell to 52.3, compared with 55.2 in May.  The subindex on production also decreased, falling to 53.7 from 54.3 previously.  The subindexes on employment and inventories fell marginally, to 51.6 and 51.1, respectively.  In contrast, the subindex on supplier deliveries rose significantly, but from a low base.  It increased to 47.3 in June from 44.5 in May.

The report was released today by Banco de México and the official statistics agency INEGI.

Comment:  The PMI is designed so that readings over 50 point to expanding activity.  At its current level, the index suggests Mexico's factory sector is still growing fairly broadly.  Nevertheless, it is disconcerting that the reading in June was actually worse than the most recent low of 51.6 in January.  Mexico's economy had been showing signs of a tentative rebound after its soft spot at the beginning of the year, but the June slowdown in manufacturing suggests the rebound may be petering out.  The biggest problem in June was probably increased concern that the U.S. Federal Reserve would soon tighten monetary policy.  That concern knocked down the value of the peso, easing one of the recent headwinds for Mexican exports and manufacturing, but it also raised worries that U.S. demand might slow.  That would go a long way toward explaining the sharp drop in the June subindex on new orders.  On top of that, Mexico's current economic expansion is already quite mature, so growth would naturally be expected to moderate going forward.  I believe Mexican exports and manufacturing activity should be able to keep growing as long as the U.S. economy continues to expand.  However, the pace of growth and the level of manufacturing activity will probably be modest.  There is also significant downside risk, especially since this week's resignation of key ministers from Portugal's government suggests the European debt crisis could be ready to flare up again.

Patrick Fearon, CFA
Vice President, Fund Management

PMI 1306

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