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Tags: manufacturing | china | economy | investors

Chinese Economy Will Be Fine, Just Not Right Away

Chinese Economy Will Be Fine, Just Not Right Away
(Dollar Photo Club)

By    |   Monday, 04 January 2016 02:19 PM EST

  • INDICATOR: December Supply Managers’ Survey and November Construction
  • KEY DATA: ISM (Manufacturing): -0.4 point: Orders: +0.3 point; Employment: -3.2 points/ Construction: -0.4%; Private: -0.2%
  • IN A NUTSHELL:  “The manufacturing sector continues to wander aimlessly and firms have slowed hiring as a result.”
WHAT IT MEANS:  The first major number of the year, the Institute for Supply Management’s Manufacturing Index, fell in December.  The sluggish industrial portion of the economy remains just that – sluggish.  Actually, activity contracted for the second consecutive month and that is causing firms to rethink their hiring practices.  Employment declined for the second time in three months.  If there was any good news in this report, and there wasn’t much, it was that the drop in new orders decelerated and the production reduction that we saw in November largely disappeared.  That does not mean the sector is positioned to start growing strongly, but maybe it can get back to a slow expansion.
Construction activity fell in November, the first decrease since June 2014.  But the data were far from showing a major problem in this sector.  The residential component rose decently but commercial building was off sharply.  The public sector didn’t help at all.  The federal government decided not to spend very much at all and state and local governments slowed their construction activity as well.  Government construction spending can be very volatile, especially in these days of tight budgets.  Even with the November decline, total construction was still up a strong 10.5% over November 2014 levels and private activity soared a robust 12.1%.
MARKETS AND FED POLICY IMPLICATIONS: Today’s economic data, even if they were strong, would likely have done little to take investors minds off of the economic issues in China. Having soft numbers, though, didn’t help. 

Still, the market reaction to weak Chinese economic data, while not a surprise, is hardly comforting.  I don’t know how many times I have noted that if anyone believes the Chinese data, I have a bridge I am willing to sell them. 

While our economic numbers bounce around like crazy, theirs move in steady patterns.  Does anyone think that China has smooth changes in their economic performance on a monthly or even yearly basis?  I have frequently noted that the markets might be efficient, but not necessarily rational.  That has drawn a lot of criticism from fellow economists.  Well, the data are disseminated rapidly and effectively, but garbage in gets you garbage out. 

The Chinese economy has been slowing and will likely continue to do so as it transforms into a more consumer-dependent economy.  Just as it is wrong to say that lower energy prices is bad for the U.S. economy in the long run because in the short run, the energy companies adjust faster than consumers, it is wrong to argue that the transformation in China implies major problems for the country because exporters are forced to adjust faster than consumers can make up for the decline.  Assuming that a group of central planners can manage the transition seamlessly was not rational, which is why I have my view of the rational nature of investment activity.  The Chinese economy will be fine, just not right away. 

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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The manufacturing sector continues to wander aimlessly and firms have slowed hiring as a result.
manufacturing, china, economy, investors
Monday, 04 January 2016 02:19 PM
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