2010: link to this year's blog below

This year's blog can be found at:

http://economex2010.blogspot.com

Unemployment in the US: who's to blame?

In a survey of people who have lost their jobs, unemployed Americans apportioned the blame for the high unemployment rate as follows:

26% -- President Bush

12% -- banks

8% -- jobs going overseas

8% -- politicians

3% -- President Obama

That 8% of the unemployed blame job flight is bad news for free trade. See the article on the impact of unemployment in the following link:

www.nytimes.com/2009/12/15/us/15poll.html?th&emc=th

Mexico's share of US imports picks up

In the first ten months of 2009, Mexico's exports accounted for 11.2% of US imports, a percentage point more than in the same period of 2008. China's share rose 3.5 percentage points, to 19.1%.

The US imported more vehicles and autoparts to the US (by value) in the first ten months of this year than any other country: nearly one out of every four dollars (23.9%) spent by Americans on imported vehicles and autoparts went to Mexico. Canada was close on Mexico's heels (US$28.2 billion compared to Mexico's US$29.5 billion), followed by Japan (US$25.9 billion). More than two-thirds (67.8%) of US vehicle and autoparts imports came from the three countries in the first ten months of 2009.

Mexico's exports to the US are heavily tilted towards autoparts, which are almost four times as large as the value of exported vehicles. Japan was the largest exporter of cars (US$18.2 billion), followed by Canada (US$17.4 billion), Germany (US$8.5 billion), with Mexico in fourth place (US$7.5 billion).

Changes...

Today President Calderon nominated Finance Minister Agustin Carstens to replace Guillermo Ortiz, whose term as Governor of the central bank (Banxico), ends on December 31. Carstens' nomination was well received.

Ernesto Codero, who was head of Sedesol (the Ministry of Social Development) until today, will replace Carstens in Hacienda. There's the rub. The President knows Cordero well but the markets don't.

Furthermore, putting Hacienda in the hands of a man so closely identified with the PAN and the President virtually ensures that the fiscal reform on tap for 2010 will be dead on arrival when it gets to Congress.

Disinvestment

For the first time in some thirty years (the second quarter of 1967), there was a US$0.64 billion OUTFLOW of direct foreign investment (DFI) in the third quarter of this year. Banco de Mexico, the central bank, tells us it was the result of a single company's repatriation of capital. New DFI was negative to the tune of US$1.06 billion between July and September; reinvested profits totaled US$0.07 billion; and parent companies extended US$0.34 billion in debt to their subsidiaries.

Another figure in the capital account -- the portfolio investment number -- was disturbing. Foreigners increased their net position in Mexican equities and fixed income obligations by US$4.34 billion in the third quarter. The inflow been larger in only four quarters since 1989, when portfolio investment was first broken out. Those quarters were: the first and last quarters of 1993 (US$4.99 billion and US$6.72 billion, respectively); the fourth quarter of 1994 (US$4.93 billion); and the first quarter of 2006 (US$4.34 billion).

Given the magnitude of the portfolio investment in the third quarter, is the strength of the peso a surprise? However, portfolio investment is a shaky base upon which to rely...

How much direct foreign investment has there been in Mexico this year?

When the central bank published the balance of payments statistics for the second quarter almost three months ago, it reported that direct foreign investment (DFI) totaled US$9.98 billion in the first six months of the year. Now, the Ministry of the Economy tells us that DFI in the first nine months of 2009 totaled US$9.75 billion.

Was there an outflow of DFI in the third quarter? Was DFI "overcounted" or double counted in the first part of the year?

Remember what a surprise the second quarter numbers brought? In May, DFI in the first quarter was reported to be US$2.66 billion. Three months later, when the second quarter numbers were published, DFI in the first quarter was revised: what had been US$2.66 billion more than doubled, to US$5.53 billion. Will the third quarter figures contain downward revisions for the first half of the year?

Here's the link to a concise analysis by the governor of Mexico's central bank, Guillermo Ortiz, of the causes and consquences of the crisis, along with his assessment of some of the measures proposed to prevent its repetition.

www.banxico.org.mx/publicaciones-y-discursos/discursos-y-presentaciones/discursos/%7B6D43C45D-EB35-C606-5CDC-F172DEEDCCEE%7D.pdf

Politics Makes Strange Bedfellows

After PRI Senator Manlio Fabio Beltrones' break with his party's position in favor of President Calderon's modified Income Law (LIF), it might be surprising to see Beltrones making common cause with the PAN on the Expenditures Law (PEF). The answer to the riddle is to be found in the distribution of expenditures between the federal government and the states.

PRI governors want the states to gain more control over spending. The PAN wants the present tilt conserved. The Oportunidades program is a battleground. Had the Administration's proposed 2% "contribution to combat poverty" been approved, some of the funds raised would have gone to Oportunidades, an effective program administered by Sedesol. As it turns out, the trade-off the PRI has presented the PAN is either to reduce the proposed funding for Oportunidades or allow the states to administer the program. According to news reports, the PAN has opted for the former.

By law, the PEF has to be approved by November 15. Congress does have the option to extend the deadline to December 31. What happens if Congress approves a budget which President Calderon vetos? If Congress does not pass a new budget, one acceptable to the President, by December 31, the 2008 budget will remain in force.

Stock Market Returns in the US

Here's an interesting fact....

Annual real returns (including dividends) on the S&P 500 under the previous four US presidents are as follows:

Reagan 10.08%
Bush I 10.16%
Clinton 14.35%
Bush II - 5.81%

Pemex's investments: in or out of the budget?

This year, Pemex's investments are included in the public sector finances, which explains why we've seen increases on the order of 75% in real terms in public sector investments at the same time that companies complain that the infrastructure program hasn't taken off. However, the section on expenditures in the 173 page "Perspectives and Economic Agenda for 2010-2015" document that complemented the 2010 budget presented to Congress last night consistently cites expenditures excluding Pemex's investments.

Net: Read the definitions closely. The government includes Pemex's investments when it wants to emphasize that it's implementing an expansionary fiscal policy. When the deficit will be uncomfortably large, as is the case in 2010, the numbers the government presents excludes investments by Pemex. Voila! A public sector borrowing requirement of about 4% of GDP is a deficit equal to 0.5% of GDP. Both statements are true: the former includes borrowing for Pidiregas and Pemex's investments; the latter does not.

Consistency?

The contrast between President Calderon's third Informe and the budget proposal presented to Congress six days later is striking. The 2010 budget proposal combines higher taxes and flashy expenditure cuts that don't attack the root of the problem with a deficit -- hardly a signficant reorientation of the public sector finances or the dramatic call for action of the Informe.

President Calderon laid out his Administration's "top ten" priorities for the remainder of his six-year term yesteray in his third Informe. It's clear he's aware of what needs to be done to boost Mexico's sustainable long-term growth rate. Can he do it?

Following is Banamex's summary of the 10 points.

1. Concentrar la fuerza y recursos del Estado para combatir la pobreza;
2. Universalizar la cobertura de servicios de salud en el ámbito nacional;
3. Promover una educación de calidad para garantizar una salida definitiva de la pobreza;
4. Llevar a cabo una profunda reforma de la hacienda pública que sustituya los decrecientes ingresos petroleros con fuentes alternativas de ingreso, que racionalice el gasto, amplíe la base gravable de manera sustentable y combata la evasión fiscal;
5. Reformar la estructura de la economía nacional para volverla más competitiva y fortalecer su capacidad generadora de empleo. Esto implica emprender una profunda modernización de las empresas del sector energético, que ya requieren una segunda generación de reformas y mayor firmeza para actuar contra intereses corporativos;
6. Reformar también el sector telecomunicaciones para hacer realidad la convergencia y abrir paso a una mayor competencia;
7. Modernizar el marco legal del empleo para promover una mayor productividad sin afectar derechos adquiridos de los trabajadores;
8. Desarrollar una reforma regulatoria de fondo para que el gobierno tenga una regulación base cero, que elimine costos de transacción tanto para los ciudadanos cuanto para las empresas;
9. Profundizar y ampliar la lucha contra el crimen organizado mediante el fortalecimiento del Estado de derecho pero también apelando a la participación coordinada de ciudadanos y gobiernos estatales;
10. Emprender una nueva reforma del sistema político para pasar del objetivo de “sufragio efectivo” a otro de “democracia efectiva”, donde la pluralidad no implique parálisis.

Income Distribution in the US

Here's the link to a study on the evolution of income distribution in the US. 2007 was a good year for everyone, especially for the super rich, the top 0.01% of the income distribution (almost 15,000 families whose income was at least US$11.5 million).

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

PRI redux

Since 1997, the president's party has lost the mid-term elections. This year was no exception. President Calderon's personal popularity didn't translate into a vote for the PAN.

The magnitude of the PRI's victory was startling. The PRI not only is expected to more than double its number of seats (from 106 to 233-237), it won five of the six gubernatorial races. The PRI's gains came at the expense of the PRD, which lost 55 seats, and the PAN, which lost 64 seats. Although the Greens picked up 4 seats, the other small parties lost 17.

The correlation of forces in the new Chamber of Deputies will be radically different. The PRI replaces the PAN as the largest single party. If the PRI can count on the votes of the Greens, it will have an absolute majority. The PAN will not even have the votes to sustain a presidential veto in the Chamber, which controls the budget. The election results boot the PRD out if its second force" slot into a distant third, with half the number of seats (72) as the PAN's 143.

Abstention was high -- 55.3%. Three out of five Mexicans (60.9%) opted out, if those voters who cast blank ballots are included. Almost as many Mexicans chose to cast a blank ballot (5.6%) as voted for the PT and Convergencia combined (6.2%).

Will the PRI's victory make the passage of the much-needed reforms more or less likely? That depends on how the party's leaders read the costs and benefits of enacting reforms in the 2012 elections. If the PRI believes that voters will blame Calderon and the PAN for unpopular reforms such as a levying value-added tax on food and medicines, then we could see the fiscal reform for which technocrats have waited so long. Otherwise, we'll be in a holding pattern until Mexico's next president takes office 3 1/2 years from now.

Are Cabinet changes in the offing? Probably, considering the PAN's dismal performance at the ballot box and that pre-election polls gave the Cabinet only a 35% approval rating.

1937, redux?

The years of the Great Depression weren't uniformly depressing in the US. An interesting article looking at the evolution of the US economy between 1933 and 1937...

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176.

Of polls and politics...

President Calderon continues to receive good marks for his performance: the results of a poll carried out in the last week of May indicate that 52% of Mexicans approved of how the president is handling his job while 40% did not. The same cannot be said of his Cabinet: only 35% approved of the Cabinet’s performance; over half – 52% -- did not. Still, the President’s approval ratings are down significantly in the last year: in May 2008, a hefty two-thirds of Mexicans approved the President’s performance; only 29% did not.

A result with disturbing implications for Mexico’s democracy is that the credibility of the Federal Electoral Institute (Instituto Federal Electoral or IFE) is at its lowest point ever. The IFE’s credibility was ten percentage points less than in August of 2006, when Mexico City’s Paseo de la Reforma was filled with the tents of protestors camping out on the street to demonstrate against the “fraud” committed by the IFE when announced that Felipe Calderon had more votes than Andres Manuel Lopez Obrador.

How people intend to cast their ballot on July 5 changed between November 2008 and the end of May and June 2009. The percentage of respondents who said they would vote for the PAN rose from 24% last November to 31%a month ago. The PRI’s share dipped two percentage points (from 31% to 29%). Only 12% of people polled intended to vote for the PRD, a dramatic drop from 2000 when that party’s candidate was nearly elected president.

The parties are attracting their voto duro, their “hard vote” of committed followers. The PAN seems to be best at expanding its reach. In November, three out of ten voters were “undecided”. At the end of May, the percentage of “undecided” voters fell to 23%. The seven percentage point drop in “undecideds” matched the seven percentage point increase in the intended vote for the PAN, suggesting that as voters made up their minds, they opted for the PAN.

Things changed a bit in June, according to a poll carried out between the 25th and 28 th. At the end of May, turnout was expected to be very low -- only 36%. A month later, projected turnout rose to 41%.

Low turnout suggests voters are apathetic and/or disillusioned. In addition there’s a raging debate amongst the intelligentsia about casting a blank ballot (voto nulo) to express dissatisfaction with the political system, the candidates nominated by the parties, the curtailing of the IFE’s autonomy, and the parties’ increasing intervention oversight of the electoral process.

The way ballots are classified and counted makes it hard to distinguish between improperly cast ballots and protest votes, which will undermine the efficacy of the voto nulo campaign. Nonetheless, the campaign seems to have been effective: of those voters who have decided to vote, the percentage saying they would cast a blank ballot, which stood at 3% between November and May, rose to 5% last week.

Low turnout and the voto nulo campaign are warning signals for those concerned about the future of democracy in Mexico. They suggest that the “electoral reform” designed by the parties and passed during this Administration (the political price for other reforms) have not convinced the public.

The PAN holds the largest number of seats in the outgoing Chamber of Deputies – 207. Based on the end-May poll results, GEA predicted that the PAN would pick up seven more seats, making it the largest single party in the new Congress. Last week’s poll results suggest the PAN will end up with 175 seats, 32 less than in the outgoing Congress.

The PRI is poised to be the big winner in the upcoming election. The PRI is expected to more than double the number of seats it holds, from 106 to 212. The latest poll results suggest that the number of seats the PRI is projected to win dipped by only one. With the seats its Green Party allies win, the PRI coalition will be by far the largest force in the Chamber of Deputies.

The big losers will be the PRD and the small parties. The PRD is projected to lose its spot as the second largest party in the Chamber, dropping from 127 seats to 95. However, the PRD has come on strong in the last month. Projections based on the end-May polling results put the number of PRD seats at just 47, which means that in the last month, the party doubled the number of seats it is projected to win.

The small parties, which had 60 seats in the Chamber of Deputies elected in 2006, are likely to have only eighteen in the new Chamber of Deputies. The Green Party (PVEM) and the Workers’ Party (PT) are each projected to capture 4% of the votes of those voters who say they’ve decided how to vote. Last week’s poll gives Convergencia, Nueva Alianza, and the Social Democrats each 1% of the vote of “decided” voters. They are in danger of losing their registrations and the prebends that go with them.

Because all of Mexico’s 128 senators are elected to a six-year term in the same year the president is elected, the extent to which mid-term elections can change the balance of power is limited. Even more than in the US, mid-term elections serve as a gauge of the president and his party’s popularity. However, if the pollsters’ findings accurately captured voters’ intentions and if voters behave as they said they intend to, the PRI will be more important than ever to the success of President Calderon’s legislative proposals.

If you thought Q1 GDP was bad...

The drop in Mexico's headline GDP in the second quarter will exceed the first quarter's 8.2% plunge. The triple whammy -- recession, an adverse Semana Santa effect, and the flu -- ensure that the year over year drop (the way the headline figure is reported) will be greater in the quarter ending this month than in the first three months of the year. We could easily be looking at a 9% drop.
Measured against the previous quarter, however, we might see that the economy has bottomed out. In the third quarter, we'll see both a smaller year over year rate of contraction and an advance against the second quarter.

1st quarter GDP: ouch

Mexico's GDP contracted 8.2% (year over year) in the first quarter. On an annualized basis, that 21.5% -- ouch. The bloodbath was pretty much across the board in the tertiary sector and manufacturing. The worst in each sector were commerce, which contracted 17.2%, and the manufacture of transportation equipment contracted 38.3%.

The second quarter will be about as bad as the first. Things should look better in the second half of the year, in the sense that the contraction won't be as steep.

CEOs: the recipe for success

“Which C.E.O. Characteristics and Abilities Matter?”is the subject of a study by Steven Kaplan, Mark Klebanov and Morten Sorensen. Their conclusion: execution and organizational skills make a CEO successful. Attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours mattered more than being good at listening and building teams, or being an enthusiastic colleague and a great communicator.

For a summary of the findings, see:

http://www.nytimes.com/2009/05/19/opinion/19brooks.html?th&emc=th

1995?

2009 won't be 1995 all over again. In some ways, it will be worse.
Between the most recent data that's been published on the Mexican economy (which tells us what was happening three months ago...) and the AH1N1 virus, the contraction this year will be close to the 6.2% nosedive the economy took fourteen years ago.
Why worse? Because even in 1995, not all of the economy contracted. Exports grew, creating jobs and mitigating the economy's fall. This year, exports are plunging and, worse yet, no one expects an export boom next year. The domestic economy hasn't been -- and won't be -- able to complement exports as Mexico's "motor of growth". So, if we don't have export-led growth, we're not likely to have much growth at all.
Deborah Riner