MexECON Blog

July Industrial Production Falls 0.1 Percent

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 gain.

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 down 6.3%.

The report was released today by INEGI, the official statistics agency.

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

Industrial Production 1307

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