Mexican manufacturing sector holds steady growth trend
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The employment levels and hours worked are key indicators of the health of economic sectors that are labor intensive and of variable nature. Each indicator on its own gives little information, but provides additional insight when analyzed together.
Employment is, at best, a coincident indicator during economic declines and a lagging indicator during economic recovery. The reason for this is that hiring managers are more likely to fire people to cut costs in moments of distress and to cautiously delay hiring during recovery.
Employment serves as an indicator of labor demand, while the number of hours worked serve as a proxy for employee utilization. If employment is steady, but hours increase, it may signify that managers are being cautious about future prospects and therefore would rather increase utilization of their employees (and pay overtime) rather than hire additional workers that they may not need if demand for their products drops.
The latest data shows steady employment (an increase of only 0.35% versus the previous month) with a drop in hours worked (decrease of 0.41% versus the previous month). In this case the data implies that managers are not distressed as to fire employees but are not optimistic enough about future demand growth to hire more workers. The decreasing trend in hours worked may be interpreted as a saturation of employment, where the total number of employees is now high enough to avoid paying overtime to existing employees. This can signal a decrease in the manufacturing sector growth rate, though the positive employment growth rate means the growth is still positive (rational managers would not be hiring if they expected a contraction in the sector).
Real wages can further add insight to the mix serving as a proxy for the level of competition in the labor market (higher wages means lower competition given higher demand and growth prospects for the sector). In December real wages dropped almost 3% compared to a year earlier, which may imply high competition and point to saturation in the employment market as well. The caveat, though, is that in this case most of the decrease was driven by a drop in severance pay (over 3% compared to a year earlier). A drop in severance is actually in line with the increasing employment since it implies less people are getting fired.
Overall, data as simple as employment, hours and wages paid can come in many different combinations that when interpreted correctly can serve as a gauge of the health of the sector. The data presented above points to a steady manufacturing sector growth, which may pick up speed as the U.S. recovery continues and boosts the demand for Mexico’s manufacturing output. Previous macroeconomic data from Mexico pointed to a resilient consumer sector and now this data implies similar resilience in the manufacturing sector. The data points to a reduced short term downside for investors in Mexican funds (EWW, MEX:NAFTRAC, MXF), though no solid conclusion can be drawn in the medium to long term as these lagging indicators may reverse at any moment.
It is somewhat refreshing to read decently positive data from Mexico after continued negative macroeconomic data out of Brazil. Investors in Latam ETFs, such as ILF or GML, should be glad that Mexico (accounting for about 25% of exposure) provides diversification to portfolios over-exposed to Brazil.