Category Archives: Economic Releases

China Beige Book Shows Slowdown, Opposite Official Data

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So it’s a mixed message?
Western educated kids turning China into Japan as well?

China Beige Book Shows Slowdown, Opposite Official Data

September 25 (Bloomberg) — China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

Increases in business-investment and real estate revenue also slowed, while service industries picked up and employees became tougher to find, the survey from New York-based China Beige Book International said yesterday. The report is based on responses from 2,000 people from Aug. 12 to Sept. 4 as well as 32 in-depth interviews conducted later in September.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

The benchmark Shanghai Composite Index of stocks fell 0.4 percent at the close, while the MSCI Asia Pacific Index was down 0.2 percent at 4:50 p.m. in Tokyo.

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Comments on research report

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From DB,
Comments below:

Commentary for friday: the second print on Q2 GDP growth showed a significant upward revision to +2.5% from +1.7% as previously reported. Recall that growth was only +1.1% in Q1.

After the 3rd downward revision

Given that the deflator was revised a tenth higher (0.8% vs. 0.7% as previously reported), the magnitude of the overall revision is even more impressive. Personal consumption was unrevised at +1.8% in Q2,

Down from 2.3% in Q1 if I recall correctly

While business fixed investment was only modestly softer (+4.4% vs. +4.6%). Residential investment was also reduced slightly (+12.9% vs. +13.4%). The big changes to Q2 growth were in inventories and international trade. Inventory accumulation was lifted to $62.6b from $56.7b as first reported, thereby adding 0.6 ppt to growth compared to 0.4 ppt previously.

The question is voluntary to restock from a Q1 dip or sales growth forecast, or involuntary due to lower than expected sales.

In terms of trade, firmer exports and softer imports drove net exports to improve; as a result, the original -0.8 ppt drag from trade was revised up to zero.

Question is whether exports can be sustained through Q3 as the dollar spike vs Japan and then the EM’s hurts ‘competitiveness’

The government drag on Q2 was revised to become slightly larger (-0.2 ppt vs. -0.1 ppt as first reported). Nonetheless, the federal government drag on economic activity has diminished significantly compared to the impact in Q1 (-0.7 ppt) and Q4 2012 (-1.2 ppt). A diminished drag from the public sector should enable overall GDP growth, which was +1.6% year-on-year in Q2, to close the gap with private sector growth, which was +2.5% over the same period.

I see it this way- the govt deficit spending is a net add of spending/income. So with the deficit dropping from 7% of GDP last year to maybe 3% currently, with maybe 2% of the drop from proactive fiscal initiatives, some other agent has to be spending more than his income to sustain sales/incomes etc. If not, output goes unsold/rising inventories and then unproduced. The needed spending to ‘fill the spending gap’ left by govt cutbacks can come from either domestic credit expansion or increased net exports (no resident credit expansion/savings reductions. I don’t detect the domestic credit expansion and net export growth/trade deficit reduction seems likely given the dollar spike and oil price spike?

If we achieve +3.0% growth in the current quarter and +3.5% in Q4, this will push the year-on-year rate to +1.7% in Q3 and +2.5% by yearend. (this is in line with the Fed’s central tendency forecasts, which are due to be updated at the september FOMC meeting.)

In order for our growth forecast to come to fruition, we will need to see a pickup in consumer spending,

Hard to fathom, as personal consumption has been slipping from 2.3 in Q1 to 1.8 in Q2, and walmart and the like sure aren’t seeing any material uptick in sales? Car sales are ok, but further gains from the June high rate seems doubtful as July has already posted a slower annual rate.

homebuilding and business investment relative to first half performance. The first two series are likely to be boosted by sturdier employment gains, and hence faster household income growth.

Seems early Q3 reports show falling mtg purchase applications, home sales falling month to month, and lots of anecdotals showing the spike in mtg rates has slowed things down. So growth from Q2 seems unlikely at this point?

We are confident that the pace of hiring will pick up in the relatively near term, because jobless claims continue to hold near cyclical lows.

New jobs dropped to 160,000 in july, and claims measure people losing their jobs, not new hires. Also, top line growth, the ultimate driver of employment, remains low, so assuming actual productivity hasn’t gone negative a spike in jobs is unlikely?

Given the usefulness of jobless claims as a payroll forecasting tool, it should come as little surprise that they are also significantly correlated with wage and salary growth. In fact, over the past 25 years, the current level of jobless claims has typically coincided with private wage and salary growth above 6% compared to 3.8% in Q2.

As above, claims may have correlated with all that in the past, but the causation isn’t there. Looks to me like claims are more associated with ‘time from the bottom’ as with time after the economy bottoms firings tend to slow, regardless of hiring?

Meanwhile, the third growth driver noted above—business investment—will largely depend on the corporate profit trend. Yesterday’s second print on GDP provided the first look at economy-wide corporate profits, which rose +3.9% in Q2 vs. -1.3% in Q1. Many analysts fretted the decline in profits in Q1, because they tend to drive business investment and hiring plans. We dismissed the Q1 weakness as a temporary development which occurred in lagged response to the growth slowdown in Q4 2012 and Q1 2013. The fact that profits are reaccelerating (+5.0% year-on-year versus +2.1% in Q1) is an encouraging development in this regard.

Profits also are a function of sales, which are a function of ‘deficit spending’ from either govt or other sectors, as previously discussed. And, again, i see no signs of ‘leaping ahead’ in any of those sectors.

Faster GDP growth through yearend should result in even stronger corporate profit growth.

Agreed! But didn’t he just say that the GDP growth would come from business investment that’s a function of profits (and in turn a function of sales/GDP)?

To be sure, the additional growth momentum now evident in the Q2 GDP results makes our 3% target for current quarter growth more easily attainable. –CR

I don’t see how inventory growth is ‘momentum’ and seems there are severe headwinds to Q3 net exports as drivers of growth?

And govt is there with a deficit of only 3% of GDP to help offset the relentless ‘unspent income’/demand leakages inherent in the global institutional structure.

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GDP and Jobs

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GDP measures domestic spending on output, and when it falls for any reason there is that much less reason to employ, unless productivity is falling fast enough, which generally isn’t the case.

When govt ‘gets out of the way’ with sequesters, income and jobs vanish, as does spending that depended on that income and employment. Likewise, tax increases remove funds that were supporting spending, output, and employment. Of note I just read that consumer spending is now forecast to decelerate further to something under 3% for Q2.

What ‘remains’ is an economy with that much less ‘external funding’, which is then relying on ‘internal’ increased deficit spending to fund its ongoing demand leakages. Not to forget the ‘automatic fiscal stabilizers’ which means to grow the ‘forces of growth’ have to be strong enough (enough credit expansion) to accommodate govt incrementally removing funding via higher tax payments and reduced transfer payments associated with growth.

Meanwhile, markets are supported by confidence that QE is the ‘Bernanke put’/safety net that can reverse any decline by simply increasing it as needed, when in fact we are flying without a net.

And the trajectory, to me, at the moment, continues to look downward- the stuff of bursting bubbles.

Today’s industrial production releases, attached, support the same continuing modest deceleration theme.

So let’s hope mtg apps are up sharply tomorrow, and claims down sharply Thursday!

Real GDP QOQ SA vs Non Farm Payrolls MOM


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Industrial Production Monthly and YOY


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Consumer Credit Year Over Year

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I keep looking for domestic credit expansion, to fill the ‘spending gap’ left by the tax hikes and sequesters.

The headline uptick in consumer credit looked promising, but seems there’s some kind of ‘seasonal’ factor at work, as it’s done this every year for the last three years, so the year over year change isn’t showing any signs of life.

Nor is mortgage debt outstanding or any other measure of lending that I’ve seen showing any material growth.

I’m now hearing Q2 GDP growth estimates are down to +1 to + 1.5% or so. This is to be expected when the federal deficit reduction measures aren’t being ‘offset’ by domestic credit expansion and/or increased net exports. In fact, the higher than expected trade deficit was the latest thing to pushing down GDP estimates.

Worse, with a bit of a lag, lower GDP growth = lower sales growth= lower job growth (presuming ‘productivity’ doesn’t collapse) and then the lower job growth feeds back into lower sales, etc.

So yes, more jobs mean more income for those working, but without sales and earnings growth their paychecks reduce corporate incomes which then drives ‘negative adjustments’ in hiring policy, etc.

The answer, as always, is quite simple- cut taxes and/or increase govt spending, depending on one’s politics.

Unfortunately govt- and not just our govt, but all govt that I know of- is still going the other way and continuing to make things worse.


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uh oh…

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>   
>   (email exchange)
>   
>   On May 16, 2013 8:31 AM, wrote:
>   
>   Weak data and lower CPI, bond positive
>   

Yes

Very bad news
Confirming my fears

>   
>   PHILLY FED AWFUL -5.2 VS +2 EXPECTED
>   

:(

Credit accelerator going into reverse?
Too small deficit to get larger the ugly way?

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GDP miss ‘just’ govt

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This plays to investors who think a drop in govt spending is good for the private sector as it ‘gets govt out of the way’ and ‘opens the door’ for that much more private sector growth in short order.

While this could be sort of but not necessarily true at full employment, it is of course not true in any case with with today’s excess capacity.

Seems they forget that today, cuts in govt spending immediately translate into cuts in private sector sales, which are the driver of private sector output and employment.

Yes, private sector credit expansion has (had?) begun to ‘kick in’, somewhat more than replacing the decline in govt deficit spending from the ‘automatic fiscal stabilizers’ of slowing transfer payments and rising revenues from higher incomes. The causation was from more ‘borrowing to spend’ in the economy to less deficit spending.

And that all can accelerate and continue for many years before, left alone, the deficit gets too small (and shrinking) to support the growing private sector credit expansion, as it all becomes unsustainable and implodes.

But at any point during that credit expansion, a pro active dose of govt deficit reduction can remove sufficient income to restrict the private sector’s credit expansion. People who may have borrowed to buy a house or a car, for example, suddenly losing their jobs and those purchases not happening, etc.

So the idea that 3% GDP is a ‘given’ due to private sector credit expansion and therefore a proactive tax hike and spending cut of maybe 1.25% of GDP will lower that to 1.75% growth misses that dynamic, as it presumes the proactive fiscal adjustments don’t throw a monkey wrench into the credit expansion dynamics. Like what’s been happening in the euro zone.

—– Original Message —–
At: Apr 26 2013 07:39:34

The miss was mostly a result of government declining, again. This is really the surprise. Trade was also a drag, but from a surprise perspective government is the winner. In all, gov subtracted a chunky 0.8ppts from the topline – meaning if you add it back Q1 would have printed 3.3%.

Having said that, this a rearview mirror report and what we already know about the handoff to Q2 is that it was weak. Indeed, we are looking for a rather paltry 1% outcome here in Q2.

Finally, in terms of today’s report, no underlying detail is inconsistent with our thinking about the handoff to Q2.

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