Back in October, we wrote about the GDP
growth gap between the U.S. and Mexico that opened during
the first three quarters of 2013. At the time we argued that
the unusual differential stemmed from, first, the contrasting
dynamics of the two countries construction sectors and,
second, the U.S. expansion, which appeared to be benefiting
domestic producers at the expense of imports. We argued that
these effects would fade over time and that the Mexican economy
would strengthen as the U.S. itself accelerated.
Mexicos lag has worsened during the past few months.
The countrys gross domestic product climbed a meager 0.7
percent quarter-over-quarter, seasonally adjusted annual rate,
during the fourth quarter of 2013, compared with 3.2 percent
U.S. GDP growth. Although the latter figure will likely suffer
downward revisions, the U.S. economy is distinctly
outperforming that of Mexico. According to the latest figures,
U.S. growth averaged 2.7 percent last year, versus 0.7 percent
in Mexico (see chart 1). Moreover, the two economies
manufacturing cycles, which had been tightly linked during the
first several months of 2013, separated toward the end of the
year, with Mexican manufacturing shrinking as its U.S.
counterpart expanded at a healthy pace. These developments make
the earlier explanation look incomplete, although eventual
normalization of the U.S.-Mexico link still appears likely.
Mexican industrial production continues to stagnate, in
contrast to U.S. industry, which accelerated strongly both at
the start of 2013 and again during the fourth quarter (see
chart 2). For much of last year, manufacturing in Mexico
outperformed overall industry, with the difference mostly
reflecting weakness in construction. But manufacturing activity
also fell in the fourth quarter, just as construction was
stabilizing (see charts 3 and 4). The earlier construction
swoon appears related to financial difficulties at
Mexicos main homebuilding companies and to slow project
execution in the early days of the new federal administration,
a typical pattern. These effects are passing, although Mexico
continues to lack the strong input from construction that
even after the mid-2013 rise in longer-term interest
rates has benefited the U.S. economy during the past two
Three factors likely account for much of the contrast
between recent manufacturing strength in the U.S. and the
sectors stumble in Mexico. First, U.S. exports surged in
late 2013, partly in response to firmer international growth.
Mexico, with its greater focus on the U.S., did not benefit as
much from that improvement. Second, U.S. manufacturers built up
inventories aggressively during the second half of 2013,
behavior not mirrored in Mexico and which, in the U.S.,
seems to have already begun to reverse. Third, the modest
acceleration in U.S. final domestic demand that took place in
the second half of 2013 did not do much to boost imports. U.S.
imports grew very weakly in the fourth quarter relative to
overall GDP, continuing a pattern evident since the start of
the present expansion (see chart 5). That shift probably owes
in part to the completion of the globalization process, with
emerging-markets economies no longer benefiting from this
Given the modest growth in U.S. imports, Mexican exports are
behaving as expected. If one strips out oil and agriculture to
focus just on manufactures the category of shipments
influenced by the exchange rate and overall competitiveness
U.S. purchases from Mexico actually grew a little more
rapidly last year than did overall imports (see chart 6).
Mexico has not consistently gained market share in the U.S.
since China joined the World Trade Organization, but neither
has it lost shelf space. Just as with total U.S. imports,
though, Mexican exports to the U.S. appear to have stagnated in
seasonally adjusted terms during the fourth quarter of 2013,
helping to explain softness in manufacturing.
In retrospect, Mexicos lead over the U.S. in overall
growth in 2011 and 2012 likely set up the economy for some
negative payback. In those two years, Mexican quarterly GDP
gains averaged 3.7 percent, versus 2 percent north of the
border. Just as todays lag looks unusual by historical
standards, so too does that earlier outperformance appear large
relative to longer-run trends. During that period, the U.S.
economy suffered from weak international growth, especially in
the euro zone, and intense domestic deleveraging. Both factors
weighed disproportionately on U.S. economic expansion. The
passing of these influences appears to be helping the U.S. more
Data for early 2014 suggest that one-off boosts to U.S.
growth in late 2013 are now unwinding. The two economies seem
likely to reconnect soon, especially with the Mexican
construction sector seemingly past its bottom. Recently
implemented tax hikes in Mexico, however, may dampen consumer
spending for a time, delaying convergence. More generally, with
globalization seemingly having played itself out, the benefit
of easy international market-share gains is no
longer operating in favor of emerging economies like Mexico.
True, Mexico failed to pick up share within U.S. imports during
the past decade or so. But overall, imports were still
outgrowing the broader U.S. economy, providing support to
Mexico that may no longer prove available.
Meanwhile, the vaunted U.S. manufacturing revival, which had
been expected to benefit the entire North American supply
chain, is proving slow to materialize. Whereas broad trends in
Mexicos economy will likely continue to depend on
developments in the U.S., stronger U.S. growth will likely not
exceed 1-for-1 the Mexican data. Restoring the persistent
outperformance of Mexican growth relative to the U.S., evident
from the mid-1990s until recently, will likely depend less on
the traditional U.S. export channel and more on successful
implementation of sweeping reforms, intended to raise
investment and productivity, recently approved by Mexicos
Michael Hood is a market strategist for J.P.
Morgan Asset Management.
J. P. Morgans disclaimer.
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