Macro Analysis /

Mexico: Family remittances – Strength prevails amid mounting uncertainty

  • Remittances totaled US$5,030.8mn (+14.1% y/y) in September, with the number of operations and average amount sent up

  • Flows grew 4.2% m/m, underpinned by US economic and labor market resilience, with the latter helping Mexican migrants

  • We remain optimistic on remittances and will focus on US activity and employment given increasing headwinds

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

Francisco Jose Flores Serrano
Francisco Jose Flores Serrano

Senior Economist, Mexico

1 November 2022
Published byBanorte
  • Remittances (September): US$5,030.8 million; Banorte: US$4,973.0mn; consensus: US$5,000.0mn; (range: US$4,973.0mn to US$5,258.5mn) previous: US$5,121.5mn 

  • Inflows remained above the US$5 billion mark for a fifth month in a row and grew 14.1% y/y, above the 7.8% of the previous month. Hence, the 12-month sum reached a new historical high, at US$57,200.8 million 

  • The number of operations stood at 12.7 million (+10.1% y/y), lower than its historical high of 13.6 million seen last May, but once again driving the advance. The average amount reached US$394.98 (+3.7%) 

  • Inflows grew 4.2% m/m in sequential terms, not enough to make up for the -5.4% observed in August. Nevertheless, the trend remains strong, underpinned by US economic and labor market resilience 

  • Watching October’s nonfarm payrolls in the US as the economy seems poised to slow down in 4Q22 and beyond. In our view, this could affect dynamism, although inflows should stay overall positive in the short- and medium-term

Remittances extend their favorable trend in September. The amount was US$5,030.8 million, above the US$5 billion mark for a fifth month in a row. The result is favorable considering that the period’s seasonality is less positive at the margin. Moreover, growth stood at 14.1% y/y, back to a double-digit pace after August’s +7.8%. In our view, this was supported by a resilient US economy. Specifically, consumption was favorable, with retail sales’ control group beating expectations, stronger confidence, and personal income and spending up relative to the previous month. Industrial production was also better. On the other hand, gasoline prices kept falling, with the average retail price at US$3.72/gallon (-7.2% m/m). This might have helped lessen the burden of high inflation on households’ income, despite remaining elevated in the month (headline: 0.4% m/m; core: 0.6%), especially on shelter costs. The latter keeps dampening wage growth, with average hourly earnings up 0.3% m/m (+5.0% y/y, below inflation).

Growth remains driven by the number of operations, but the average amount sent improved at the margin. The former metric stood at 12.7 million (10.1% y/y). In our view, the positive trend in the number of working-age Mexican migrants (see section below) helps explain this. In addition, the average amount sent picked up to US$394.98 from US$390.23 in the previous month. As such, its growth rate accelerated to 3.7%. We still believe that the latter is most at risk of decelerating due to price dynamics, as despite migrants’ efforts to adjust their consumption baskets, an effect on their disposable income is likely to be more evident here.

Sequential growth resumes. Seasonally adjusted, remittances grew 4.2% m/m. Despite of the latter, it was not enough to make up for the -5.4% observed in August. Sequential dynamics have been more volatile lately, but we think that the trend remains strong. In turn, it remains our take that US employment conditions keep underpinning flows. In this sense, non-farm payrolls in the period showed a net creation of 263k positions, moderating from 315k in August, but with the unemployment rate inching lower, to 3.5% (previous: 3.7%). The latter metric had a slightly larger improvement for Hispanics and Latinos, down to 3.8%, its lowest ever. On a similar tenor, we estimate that it declined by 116bps –to 3.5%– among Mexicans. The working age population –including ‘natives’, ‘non-native citizens’, and ‘non-citizens’ (legal or illegal)– increased by 147k, in line with its seasonality. Moreover, there were 378k more employees, recouping last month’s losses. In our view, these results suggest that August’s apparent deterioration in labor conditions could have been mostly temporary, with these improvements still key for flows.

We remain optimistic on remittances, albeit focused on US activity and employment. In our view, the report was favorable despite showing the first hints of a moderation in flows. Relatedly, timelier data for October suggests increasing headwinds that could eventually show up in the labor market. First, PMIs from S&P Global weakened, with manufacturing at 50.4pts from 52.0pts previously –also confirmed by the decline in regional indicators such as the Philly Fed and Empire– while services extended their move towards contraction (at 46.6pts). Moreover, the Conference Board’s consumer confidence dropped to 102.5pts, its lowest since July.

Nevertheless, the weakest link is the housing sector, which is important as construction is a relevant employer of Mexican migrants. For example, the NAHB housing market index fell to 38pts from 46pts previously, indicating weakness as it reached its lowest level since May 2020, in the midst of the pandemic. Mortgage applications declined 4.5% y/y as higher financing costs hit, with the 30-year fixed rate loan at 7.2% on average nationwide, highest since 2000.

In this backdrop, we will closely analyze the details of October’s nonfarm payrolls report, to be released on Friday. We anticipate a deceleration in job creation to 215,000. The unemployment rate would increase modestly, to 3.6% from 3.5% in September. Specifically, it will be important to see the sectoral composition of new jobs. Industry could weaken (e.g. manufacturing and construction) but gains in services could offset for this, a sector that is also an important employer of migrants.

We believe the labor market will remain strong despite a likely slowdown, at least in the short term. Hence, we reaffirm our forecast of US$59-60 billion in fully-year 2022 inflows. Nevertheless, we are more cautious about the outlook for 2023 due to the possibility of a recession that would eventually hurt employment in the US.