MexECON Blog

Leading Index Falls Yet Again

Mexico's May index of leading economic indicators declined to 99.8, after revisions showed readings of 99.9 in each of the previous two months.  The index has now been flat or down for eight straight months, leaving it at its lowest level since November 2009.  According to the report, the fall in May came entirely from weaker readings in just two of the six subindexes.  The subindex on corporate managers' willingness to invest fell for an eighth straight month, reaching 98.8, and the subindex on U.S. stock prices edged downward to 100.2.  The May subindex on interest rates was unchanged at 100.0.  On a brighter note, the subindex on Mexican stock prices rose slightly to a six-month high of 99.9, and the subindex on manufacturing employment rose to a 35-month high of 100.8.  The May subindex on the inflation-adjusted exchange rate rose to 101.3, its highest level since July 2009.

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

Comment:  Mexico's leading index is designed so that readings of 100 point to the economy growing at its long-run tendency in the coming months.  When the index is below 100 and falling, as it is now, it suggests the economy is slowing and falling farther below its potential.  Nevertheless, the slide in the index over the last year does not necessarily mean that Mexico is headed toward an outright recession.  Since 1990, the index has temporarily fallen below 100 several times without the economy falling protractedly.  What the index is currently showing is simply that Mexico has been impacted by the lull in the U.S. economy during the winter and the on-going challenges in the U.S. manufacturing sector.  Those challenges include the strong dollar, weak growth in Europe and Asia, falling investment in the energy sector, and limited growth in personal income.  As long as those problems remain, Mexican exports, manufacturing, and corporate optimism are likely to remain soft, in spite of the weak peso.  On top of that, domestic demand in Mexico also faces some headwinds, such as declining petroleum production and low oil prices, which have weighed on government oil revenues and forced a cut in public spending.  Fortunately, recent reports show U.S. corporate demand appears to be accelerating again, while stronger labor markets north and south of the border hold out the potential for a continued recovery in consumer spending.  I suspect that will limit any near-term slowdown in the Mexican economy.

Patrick Fearon, CFA
Portfolio Manager

Leading Index 1505

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