Gloomy Data?

Yesterday I posted my impressions of the economy in China.  While I saw clear evidence of booming consumption in Beijing, this seems to be supported by deep inequality and a scramble for ‘grey’ (off -the-books) income rather than by broad and solid prosperity.

The data from both China and Europe that came in over the weekend seems to support this view, all of it pointing downward.

In China, the manufacturing PMI was revised downward, indicating sharper contraction in the economy.  Employment, new factory orders, and exports all are contracting.  In July, manufacturing hit a nine-month low.  This was supposed to be the time when China rebounded from a first-half of the year slowdown; instead the slowdown seems to be accelerating.  Demand for loans has dried up: July remimbi loans were the lowest in 10 months.  Since loan demand indicates future investment and growth, this is a bad sign.  Official figures had put China’s growth at 6.8% and 6.9% for the first two quarters of 2012, as against the official 2012 growth target of 7.5%.   It now looks like that target, once seen as a typically pessimistic underestimate that would be routinely exceeded, will be difficult to reach. In some inland cities, where growth is targeted to help people catch up to the coast, factories are closing due to lack of demand.  At the same time, higher wages for skilled assembly workers, driven by slowing migration and young people’s preference for white-collar jobs even if they pay less, is leading some manufacturers to shift production to southeast Asia.

The turn-around is not small, especially compared to past booming growth.  The FT reports:  “The association of Chinese textile exporters said last week that garment exports fell 0.2 per cent in the first seven months of the year, compared with a 24 per cent increase in same period last year. …  In the woollen knitwear-producing Dongguan suburb of Dalang, manufacturers complain that gross margins have collapsed from 30-50 per cent in the late 1990s to five to eight per cent today.”

China’s woes are wrapped up with those of Europe — and today brought more gloomy data from the Eurozone as well.

Today’s FT reported that Eurozone manufacturing dropped for the 13th consecutive month in August, as Germany’s exports fell at the steepest rate in three years.  Italy’s manufacturing index dropped to a 10 month low (the recovery is coming when?).  Spain and Greece both showed their economies continuing to contract, albeit at a slighly slower rate.  The one positive was that Ireland has returned to growth by a small margin.  July unemployment in the Eurozone hit a new high, at 11.3 percent.  With July unemployment at record levels, and August data showing a contraction, it is hard to see how Europe will avoid a net downturn for the 3rd quarter, pushing Europe into a true double-dip recession with two consecutive quarters of economic contraction.

Despite all the gloomy data, financial managers remain optimistic.  Why?  Because by their logic, bad economic data will force the ECB and the Fed to take drastic measures to pump up their economies, with the ECB cutting interest rates and buying bonds and the Fed undertaking QE3.  These measures will in turn light a fire under equity prices, as bonds become yet more unattractive.  Such has been the reasoning driving markets this year.  So despite evidence of deepening downturns in Europe, China, and Brazil, and the fiscal cliff looming over America, stock prices are bumping multi-year highs.

Yet is it unreasonable to ask whether this reverse psychology reflects some strange decoupling from reality?  What if gloomy data really is just that — gloomy data?



About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in The Global Economy, U.S. Politics and tagged , , . Bookmark the permalink.

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