Despite Weak U.S. Economy, Mexico Leaps Ahead : * Trade: Foreign investment is fueling a robust 5% growth rate in the Mexican economy.

When the U.S. economy sneezes, according to common wisdom, Mexico catches pneumonia.

With two-thirds of its exports sold in the United States--and one of every eight manufacturing jobs in plants that market nearly all their goods north of the border--Mexico traditionally has been hit hard when the United States suffered an economic downturn.

Yet during the current U.S. slump, Mexico’s economy has grown. Trade between the two countries is increasing. Indeed, Mexicans claim that their rising purchases of U.S. products have dulled the impact for some industries of the recession and weak recovery.

The phenomenon is a boon for supporters of the proposed North American free-trade agreement because it undercuts arguments that closer commercial relations would make Mexico more vulnerable to problems in the United States.

The two economies have never been more closely tied than they are today. Still, Mexico is expected to grow nearly 5% this year, while the U.S. economy remains stalled.

In part, this is because the United States and Mexico are at dramatically different points in the economic cycle. Mexico’s growth follows a six-year depression, while the U.S. economy has slowed after one of its longest periods of sustained growth since World War II.

But economists say Mexico’s resilience also reflects a new competitive drive.

“Mexican corporations and Mexican subsidiaries of U.S. companies have launched aggressive export plans in recent years,” said Mauro Leos, vice president of CIEMEX, a Philadelphia-based econometric team that specializes in Mexico. “As a result, Mexican exports have continued to increase despite the U.S. recession.”

Meanwhile, lower inflation, deregulation and dramatic moves toward free-market practices have inspired confidence in the Mexican economy, encouraging the foreign investment that has financed growth.

“Growth is exceeding what we expected, because savings are growing faster than we expected and demand is growing faster than we thought,” said Ernesto Zedillo, planning and budget minister. “People are putting their money into Mexico because of increased confidence in the economy and the financial system.”

However, in many cases the economic gains have not filtered down to the Mexican working class, who continue to see their buying power shrink. While the minimum wage was raised 12% this year, inflation is expected to be higher than 16%. Zedillo acknowledged that keeping inflation under control while sustaining growth is one of the major challenges facing the Mexican government.

Mexico’s ability to overcome the problems north of the border is due in large part to companies such as Cummins Engine Co.

The Columbus, Ind.-based diesel engine manufacturer is investing $24 million to add two crankshaft assembly lines to its San Luis Potosi manufacturing plant. All but 1% of the 140,000 crankshafts that the factory makes each year will be exported to the United States for further assembly.

Increasingly, U.S.-Mexican trade is based on exchanges between different divisions of the same corporation. That assures a market for Mexico’s products, so that even in an economic slump--when U.S. firms normally cut back on purchases from other countries--Mexico can continue to sell.

With its increase in exports to the United States during the recent recession, Mexico managed to gain market share at the expense of other foreign sellers, Leos said.

In addition, long-term strategic investments in Mexico have not been derailed by the weak performance of the U.S. economy. Foreign companies poured $1.4 billion into plants and equipment here over the first half of the year, fueling Mexican growth.

Another $6 billion was invested in the Mexican stock market by foreigners during the same period, supporting a boom that has encouraged new issues to raise money for plant expansions. Officials are expecting foreign investment to top $10 billion this year.

While foreign investment continues to be dominated by U.S. companies--with interest from Europe and Japan developing more slowly than Mexico had anticipated--international confidence in the economy nonetheless has allowed Mexican firms to raise abroad more of the money that underwrites growth at home.

Earlier this month, the country’s biggest baker, the Bimbo Industrial Group, received a $100-million loan from 11 European banks and the International Finance Corp., the private-sector arm of the World Bank. The money will be used to expand production and increase exports, now barely 1% of the company’s $1 billion in annual sales.

Other corporations have gone straight to international stock markets, with offerings such as Monterrey-based glassmaker Vitro’s $165-million issue on the New York Stock Exchange this month.

In many cases, money raised abroad is used to buy foreign-made equipment and machinery. During the first eight months of this year, Mexico imported $5.5 billion worth of capital goods, 38% more than in the same period last year.

Mexican companies are also buying more components and ingredients abroad: $15.5 billion in the first eight months of the year, a 26% increase.

That benefits American companies, because about two-thirds of Mexico’s foreign purchases are made in the United States. In addition, Mexico has a trade deficit with the United States, which helps keep the overall U.S. trade deficit lower than it would be without commerce with Mexico.

The nation’s overall trade deficit has skyrocketed, but government officials claim not to be worried. These days, they point out, the deficit--$3.03 billion in 1990--is being financed mainly by investment, not by government borrowing, as in the past.

U.S. exporters can expect demand for their products to continue here, economist Leos said. Six years of stagnation, from 1982 to 1988, left a backlog of demand that will sustain Mexican growth for the medium term.

“Another recession in the United States could limit growth in Mexico, but it will not stop growth.

Tale of Two Economies

Though the two countries’ economic performance typically has been linked in the past, Mexico’s economy has thrived in the last year despite the recession and anemic recovery in the United States.