Mexican industrial production fell by a seasonally-adjusted 0.1%
during July, partially reversing its revised increases of 0.2%
in June and 0.3% in May. The decline in July came entirely
from yet another negative reading on construction activity.
July construction was down 1.1%, following a 0.7% decline in
June. While public works construction jumped 1.9%, erasing
its 1.9% fall in the previous month and marking its best increase
since 2011, that was not enough to offset continued declines in
other parts of the sector. Construction of new buildings fell
2.1% in July, marking its fourth straight decline, and activity in
construction trades slumped 2.7%, for its fourth drop in the last
five months. On a more positive note, July mining output
edged up 0.1%, and utility output jumped 1.8%. Output in the
key manufacturing sector rose 0.4%, for its third straight
On an unadjusted basis, overall industrial production in July
was down 0.5% from the same month one year earlier.
Manufacturing output was up 2.8% year-over-year, and utility output
was up 1.1%, but mining production slid 2.1% and construction was
The report was released today by INEGI, the official statistics
Comment: Starting this month,
the base year for the industrial production report has shifted to
2008, producing large revisions to some data points.
Nevertheless, the basic story is unchanged: Recent export
gains have apparently helped stabilize manufacturing, but
construction continues to be a major drag on the industrial sector
and the general economy. One big problem is that Mexican
government spending has been disrupted since the inauguration of
the country's new president last December. The big gain in
public works construction during July suggests the government may
finally be ready to loosen its purse strings again, and the
president's 2014 budget proposal this week suggests spending will
ratchet up significantly next year. However, it is still too
early to know if public works construction is really in a sustained
recovery. The other big problem is that a recent change in
housing policy has virtually frozen residential construction.
As a result, overall building activity in Mexico has fallen in nine
of the last twelve months. It is now down a whopping 7.5%
from July 2012. The drop has also had a clear impact on
related manufacturing industries. For example, Mexican
furniture manufacturing is down approximately 10.0% over the last
year. I have seen no evidence that would make me think the
problem is being solved, so I expect continued weakness in building
activity, related manufacturing, and overall economic growth.
As suggested by Mexico's negative growth in the second quarter and
the latest index of leading indicators, the economy remains at risk
of sinking into recession.
Patrick Fearon, CFA
Vice President, Fund Management