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Thinking About Remittances

Adam Rust's picture

Posted October 31, 2012

What does it mean when Western Union announces that its revenue is going to drop off in the near future?

For the company, it is clearly bad news. Even though Western Union announced an increase in their dividend and earnings that beat estimated forecasts, its shares have fallen more than twenty-five percent today. WU

says there are three reasons: Mexico, pricing pressures, and compliance. The upshot is that Western Union thinks that its business is going to cool for the next year.

Western Union is a bit of a canary in the coal mine when it comes to predicting economic growth. To the extent that it can forecast future demand for remittances, the company's expectations for its revenues should hint at the future supply of lower skill jobs in the US. It is a relatively unique window which only a few other publicly traded firms can claim to reveal: Fed Ex revenues predict business activity and Union Pacific gives some hint about demand for commodities.

I recently read that border crossings are finally picking up again. Since people cross when they think they can find work, they are a good leading indicator for the US economy.

Passenger Car Entries (000s) and Ratio of Empty to Full Truck Containers. Proxy for Employment Demand and US Export/Import Relationship.




But that may be a very recent change. I cannot get data for 2012 from the Bureau of Transportation Statistics. The story through 2011 is not so great. Passenger car entries are fairly consistent as an indicator of the demand for workers. From the late 90s onward, crossing increased dramatically. We know that this was when the boom of construction, driven by the availability of so much easy money, led to lots of jobs for foreign workers. Looking at the latest numbers, the implication clearly suggests that things have still not returned to their former ways. The 2010 and 2011 numbers are particularly unimpressive given that the supply of jobs on the Mexican side has itself declined. Even though things are bad in Mexico, people aren't clamoring to come here.

The red line says more about industrial production. When the number of empty cars relative to full cars increases, it means that we are lagging in our factory output.

This means that Western Union's results could be part of a larger story. True, the degree to which their forecast tells us more is admittedly limited by some of their own internal issues. Western Union decided to end their relationship with some [and not all, as had been inferred by the original iteration of this post] of the  Vigo Money Transfer and Orlandi Valuta - stores which constitute a fair share of Western Union's locations in Mexico. This cannot be a plus, given that Mexico is the third largest remittance market in the world.

Nonetheless, if fewer people are crossing, then WU is going to have fewer US customers. Even then, of course, these border crossing numbers are at best only a part of the story. WU is truly an international company offer remittance services in almost every country on earth. The US story does say something, given that the US is a huge economy and one of the ones doing better right now, but its still only a part.


Remittances are important for the health of many countries. If Western Union cuts off its relationships with 7,000 stores, it will present a hiccup in the flow of funds to Mexico. Mexico is probably more able to withstand this shock than elsewhere because they have a large economy in their own right.

In other places,  this situation would create have national security concerns for some countries. When a national remittance retailer loses Western Union's remittance infrastructure, it seems likely that many people will suddenly find it harder to receive money from their relatives working overseas. In places where there is a lot of retail competition that might be less of a problem, but people living in remote areas could suddenly lose their financial lifeline when their only local store loses a transfer partner. In Honduras, El Salvador, and Haiti, remittances are equivalent to 19.3, 15.7 and 15.4 percent (respectively) of national GDP.