Friday, October 26, 2007

U.S. housing slump = disaster for Mexican economy

Here is an important and underreported story: the housing slump in the U.S. is causing economic catastrophe in Mexico.

Housing starts have long considered the best single indicator of future economic growth -- it employs a bunch of people, who cycle money through the economy, and it creates a lot of demand for building materials, which has multiplier effects on the wider economy. (It's also a harbinger of inflationary pressure.) All this has led people to ask, "How is it that a collapse in the construction industry over the last year, brought on by the popping of the housing bubble, hasn't rippled out to the rest of the economy?"

Well, the article above provides a partial answer to the mystery. It turns out that the construction slump has rippled out to the rest of the economy -- it's just that "the rest of the economy" is in Mexico. The reasoning goes like this: Mexicans (legal and otherwise) overwhelming dominate the rank and file of building trade in the United States. These construction workers never spent more than the minimum necessary here to keep body and soul together, and instead remitted as much money as possible back home to Mexico. As the construction workers have lost work, they've stopped sending remittances home, with disastrous consequences in Mexico. However, they still have to spend the minimum here in the U.S. to keep themselves together, and so the collapse has had little impact on US consumer demand. To put it a little more technically: all the marginal consumer-side costs of the U.S. construction slump are being felt in Mexico, not in the U.S.

This helps explain half the mystery of why the construction slump hasn't hurt the economy more -- the consumer-side part of the story. The part that's still a mystery, however, is why the construction slump isn't causing more of a collapse in supplier industries (metals, concrete, electrical cable, Home Depot, etc).

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