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Unemployment in Mexico grinds higher, but may change quickly

Mexico's Unemployment 2013-03-06Enlarge GraphThe climbing unemployment rate confirms the weaker Mexican economy over the past few months, though the situation may change quickly

Unemployment figures are one of the best indicators of an economy’s health. The problem is that they are usually a lagging indicator since hiring picks up once an economy improves. In times of distress, they become coincident indicators, reacting very quickly to changes in the economy. Nonetheless, sharp changes in monthly unemployment can serve as momentum indicators.

Mexican unemployment inched 25 bps higher to reach 5.27%; values above 5% are historically high for Mexico (unlike Brazil that is currently at historical lows just below 5%). Urban unemployment, which looks at the top 32 metropolitan areas, was higher by almost 50 bps to reach 6.5%, which reflects a deterioration of service-oriented jobs that generally carry a larger share in big cities. This may be troublesome since the consumer sector was the only one showing decent resilience within the Mexican economy.

Additionally, the national sub-occupation rate also increased in a similar amount as the national rate. The sub-occupation rate is the amount of people that are working less than 15 hours a week whether or not they are actively looking for additional employment. The metric shows that the health of the economy is worse than it seems, though versus previous months, the sub-occupation rate is much lower.

Another interesting metric is the general pressure rate which measures the amount of people looking for a job (both employed and unemployed). This metric shows how competitive the job market is. January showed a value of 9.8% versus a 9.3% figure in January 2012. This shows that almost 1 out of every 10 people are looking for a job, making the market very competitive, creating difficult circumstances to lower the unemployment rate.

Mexico has a complicated job market, with an informal sector1 of over 60%, making the population (e.g. the consumer) very vulnerable to changes in the economy. While the conditions are not ideal, Mexico remains highly dependent on the health of the U.S. economy so while the data is overall negative, a pickup in the U.S. can change the tide very easily.

Investors in Mexican equity ETFs, such as iShares EWW or the locally traded NAFTRAC, as well as investors in Mexican closed end funds (MXF being the main one), should not be discouraged by the unemployment figures. There is likely more medium term upside than downside in Mexico, since Mexico will be boosted when and if the U.S. recovers. Delayed U.S. recovery due to the fiscal sequester and Congress inaction can affect Mexico negatively in the short term. In the longer term the picture is more uncertain given the relatively rich valuations in the Mexican stock market, though recent government reforms have investors feeling optimistic about the country.

Investors with faith in the region may also diversify their exposure to Mexico by investing in Latin America oriented ETFs (e.g. GML, ILF), which maintain a Mexican exposure of approximately 25% but also give access to Brazil, Colombia, Chile and Peru, all of which have interesting growth stories.

  1. Informal sector is defined as job dependence to unrecognized employers, as well as other non-registered micro-businesses, non-insured workers and subsistence agriculture workers.

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