You always have to careful not to selectively choose data that confirm your biases. I have long felt that the Chinese economy, given its heavy reliance on fixed asset investment cannot sustain its present growth rate and is heading for a serious slowdown. It’s easy to dismiss someone as a conspiracy theorist by suggesting that the official data coming out of China is being massaged. I have no way of confirming any such statement, however I do think it is worth listening to someone who is on the ground in China. In the video below Patrick Chanovec talks about the price increases he sees in his daily life as opposed to the official figures. Also check out his blog where he has more detail not contained in the bloomberg interview:
Following on heels of yesterday’s poor PMI reading in China comes this rather negative outlook from a mainstream financial firm.
Chinese Economy Already in ‘Hard Landing,’ JPMorgan’s Mowat Says
China’s economy is already in a so- called “hard landing,” according to Adrian Mowat, JPMorgan Chase & Co.’s chief Asian and emerging-market strategist.
“If you look at the Chinese data, you should stop debating about a hard landing,” Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. “China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.” His team was a runner-up for best Asian equity strategists in a 2011 Institutional Investor magazine poll.
The Shanghai Composite Index fell 2.6 percent yesterday, the most since Nov. 30, after Premier Wen Jiabao said home prices are still “far from a reasonable level.” His comments fueled concern the government will maintain restrictions on the property market for an extended period even as the curbs threaten to slow economic growth.
Wen announced at the beginning of a national lawmakers’ congress on March 5 an economic growth target of 7.5 percent for this year, down from 8 percent over the past seven years. Data last week showed China’s factory output in the first two months of the year rose the least since 2009, while retail sales increased less than economists predicted and inflation eased to the slowest pace in 20 months. A report today showed foreign direct investment in China fell in February.
Mowat said in May the risk of a hard landing was building in China as fixed-asset investment in real estate had increased even as property demand remained weak. That meant residential inventories will increase and lead to a contraction in construction activity, he said in a May 17 interview.
Excessive Decline
“One should be concerned about what’s happening in the China property market,” Mowat said at yesterday’s conference. “People are too complacent that the government can turn what’s going on in this market.”
The slump in Chinese stocks to Wen’s speech yesterday was “overdone” as his comments on property were only a reiteration and don’t reflect consensus in the government, Jason Todd, global head of equity strategy at Religare Capital Markets Ltd., wrote in a report. The Shanghai Composite (SHCOMP) slid 0.7 percent today for the biggest two-day loss since August.
Wen, set to leave office next year after a decade in power, also said yesterday his nation must adopt political change to support an economic transformation that has produced rapid development at the cost of a widening wealth gap.
12 months ago most scoffed at the idea that the Chinese economy was headed for a slowdown, now the debate has shifted to whether it will be a hard or soft landing. There are severe imbalances in the Chinese economy that are now acknowledged by all but the staunchest of bulls. A rebalancing of the Chinese economy will no doubt involve some pain. The track record of centrally planned economies avoiding difficulties is not a good one. China will be no different.
The latest preliminary reading of the HSBC Chinese PMI showed further contraction in the manufacturing secotr in March. From marketwatch.com:
HONG KONG (MarketWatch) — Chinese factory activity is slowing sharply, dragging on employment amid a deepening slowdown in global demand and aggravated by a stall in domestic consumption, according to March survey data showing new orders at a four-month low.
A preliminary reading of HSBC’s manufacturing purchasing managers’ index for March, released Thursday, printed at 48.1 on a 100-point scale, down from a final reading of 49.6 in February.
The flash PMI is based on 85% to 90% of the total responses during a given month and is an early indicator of business conditions facing Chinese manufacturers.
Bleak tone
In comments accompanying the data, HSBC economist Hongbin Qu sounded a bleak tone, highlighting the impact of the weak demand upon hiring trends.
“Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders, which came in at a four-month low,” said Qu. “More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises’ hiring desire.”
The deterioration in orders matched a surprise slump in industrial-production growth, adding to the darkening outlook, which will play a role in factory managers’ decisions.
“External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook,” Qu said.
As the S&P500 breaks through 1400 and the powers that be in Europe assure us that things are just peachy, Lakshman Achuthan of ECRI continues to be downbeat on the US economy still calling for recession before mid year. Yesterday on Barry Ritholtz’s Big Picture blog, Achuthan penned an explanation of his recession call. Click here for the original story.
Many have questioned why, in the face of improving economic data, ECRI has maintained its recession call. The straight answer is that the objective economic indicators we monitor, including those we make public, give us no other choice.
Let’s start with the current state of the economy. A couple of weeks ago, we publicly highlighted ECRI’s U.S. Coincident Index (USCI). It’s important to understand that the USCI isn’t a random concoction of data, but rather the gold standard for measuring current economic growth, as it summarizes the key coincident economic indicators used to determine the official start and end dates of U.S. recessions; namely, the broad measures of output, employment, income and sales. So when USCI growth is in a downturn (bottom line in chart), it’s an authoritative indication that overall U.S. economic growth is actually worsening, not reviving.
In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters. Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.
The exception to this weakening pattern is year-over-year payroll job growth, which continued to improve through January, and was essentially flat in February. However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months. But the point remains that the USCI, which summarizes the definitive coincident economic indicators – including jobs – indicates declining growth in the U.S. economy.
How about forward-looking indicators? We find that year-over-year growth in ECRI’s Weekly Leading Index (WLI) remains in a cyclical downturn (top line in chart) and, as of early March, is near its worst reading since July 2009. Close observers of this index might be understandably surprised by this persistent weakness, since the WLI’s smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months. The unusual divergence between these two measures of growth underscores a widespread seasonal adjustment problem that economists have known about for some time.
WLI and USCI y-o-y growth
Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.
However, we have no way to objectively measure the extent of these problems – either the upward bias for Q4 and Q1 or the downward bias for Q2 and Q3. Fortunately, year-over-year growth rates are naturally less susceptible to these seasonal issues because they involve comparisons to the same period a year earlier that is likely to be skewed the same way. In contrast, smoothed annualized growth rates, which we have traditionally preferred, presume proper seasonal adjustment. While the extent of the seasonal problem will be debated, monitoring year-over-year growth rates is a matter of simple prudence at this juncture not only for ECRI’s indexes but also for other economic data.
In the chart, please note the one-to-one correspondence between the cyclical swings in the year-over-year growth rates of the WLI and USCI since the Great Recession. Both surged initially, only to roll over, pop up briefly, and then turn down once again. It is notable that the WLI, which is sensitive to the prices of risk assets that have been supported by massive worldwide liquidity injections, has hardly been swayed from its recessionary trajectory. In spite of the efforts of monetary policy makers, actual U.S. economic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low.
The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle? The objective coincident and leading indexes that we have always monitored are still telling us that it cannot.
By The Fundamental Analyst, on February 24th, 2012
5 months since his recession call, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) remains adamant that the US is headed for recession by mid-year 2012.
If you are a bewildered citizen that doesn’t understand why your nation is being asked to choke down austerity measure, the question posed by this Irish journalist to ECB representatives is a good place to start. Hopefully this clip will go viral and wake a few people up to the fact that austerity is another way of aying the public is footing the bill for the poor decisions of bondholders and bankers.
