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Manufacturing Contraction in the US:
Matter of concern?

03 September 2019

The US manufacturing activity indicator, prepared by the Institute of Supply Management (ISM), fell to 49.1 points in August, which means that more companies reported decreases than increases in indicators such as production, new orders, export, import, employment, inventories, compared to the previous month. The 50 level separates growth from shrinkage.

The new orders component fell to 47.2 points, the lowest value since the 2009 crisis.

To be sure, the US-China trade war and fears of a hard Brexit taint expectations for global manufacturing.

Does this mean a negative signal for the global economy and for Mexico?

During 2016 the ISM indicator reached 48 points and there was no recession. Previously, in 1967, 1985, 1996, 1998 and 2003, this same indicator was at levels between 43 and 48 points without a recession materializing.

However, on five occasions from 1970 to the great recession of 2008 there were levels of contraction in the indicator that were effectively the preamble to recessive periods.

In general, it is difficult to forecast the future of the global economy based on a single indicator, such as the manufacturing survey.

Currently, services have a greater weight in the economy than in past decades.

What the indicator does show is a sharp drop in the dynamism of US manufacturing activity.

The uncertainty caused by trade frictions, overcapacity and changes in the distribution of consumer spending, not only in the US but in the global economy, may lead to the exhaustion of the expansion cycle of this industry.

Mexican exports to the US grew 10% year-on-year in July. This reveals a process of regionalization, in which Mexico remains a low-cost production platform close to the centers of consumption in the US.

It is difficult to imagine that the rhythm of manufacturing in the US does not affect Mexican exports, however, as long as US consumer demand does not weaken, Mexico will be a privileged production alternative.

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