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Unemployment in Mexico holds steady, finally some good news

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May unemployment figures were marginally stable compared to April

Unemployment is a key indicator of economic health. It’s a lagging indicator, and that means it’s better at confirming trends, especially downward trends, since unemployment rises faster than it falls.

Unemployment holds steady, in line with PMI employment indicator

The June PMI showed a continued slowdown in the economy, though the data employment indicator showed a five-month high. Nonetheless, other economic indicators pointed to a more bearish outcome.

The unemployment rate held marginally steady at 5.1% versus April and increased 0.1 percentage points versus May of 2012. The labor force, composed of the economically active population, remained steady at 58.9%.

The sub-occupation rate refers to the percentage of employed people in the labor force who’ve expressed an interest or need to work more. This rate remained steady as well, holding 8.6%.

Informal sector gains share

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Mexico has a very large informal economy, so many people may have part-time jobs to supplement their income that they don’t report. The latest report showed that 28.7% of Mexico’s employed population worked in unregistered micro-businesses or self-owned services. This value is 0.8 percentage points lower than it was in April, which could imply a deficiency in formal job creation, given that the unemployment rate and labor force size were unchanged compared to April.

Local outlook improving, but foreign exchange can eat your lunch

The data is somewhat optimistic, since while unemployment has more room to fall, the fact that the rate remained steady after several negative headlines (e.g. sluggish quarterly GDP, low consumer confidence, weak retail sales) shows strong resilience. A steady employment level helps maintain steady consumer spending, which can help the economy recover faster.

In the short term, Mexico will closely follow the U.S. economy, so if the market interprets the tapering of quantitative easing as a sign of a recovery market, then Mexican equities will likely benefit. The risk, though, is that the strengthening dollar has caused a 5% devaluation in less than a month, and 10% considered since early May.

This foreign exchange risk can put a dent in an investor’s portfolio. EWW has fallen 15% since early May, driven both by weakness in the local market and currency weakness.

While local economics could start to improve, it’s important to watch out for currency movements before jumping in. The dollar is likely to strengthen further once tapering actually begins, so it might be too early to get bullish on Mexico if it’s unhedged.

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