After months of slow growth, China’s economy is showing signs of picking up speed, “offering a glimmer of hope” for the U.S. and Europe, according to The Wall Street Journal (subscription).
What’s going on: “Factories in September reported their first expansion in activity since the spring, while railway and flight bookings point to a bumper week ahead for tourism as China takes a break to celebrate its weeklong National Day holiday.”
The big picture: While economists say it’s too early to call an economic turnaround—owing in large part to China’s continuing property-market slump—there are signals that things are improving.
- “An official gauge of activity in the nation’s manufacturing sector rose to 50.2 in September from 49.7 in August, China’s National Bureau of Statistics said Saturday, the first time since March that its purchasing managers index crept over the 50 mark that separates expansion from contraction.”
- Similar gauges for nonmanufacturing sectors and construction also expanded at a faster pace.
- With that said, the country’s manufacturing and overall economic growth are well below what was expected earlier in the year—particularly in the aftermath of last year’s “zero-COVID” policies. That has implications for both China and the global economy, according to NAM Chief Economist Chad Moutray.
What’s next: Many economists believe that to continue this growth, China needs more government stimulus. This could come in the form of household tax breaks, or cash or vouchers that consumers can spend directly.
New orders for manufactured goods increased in August after declining in July, according to U.S. Census Bureau data.
Factory orders: New orders rose 1.2% in August following a 2.1% decrease the previous month.
- Factory orders for durable and nondurable goods increased 0.1% and 2.1%, respectively, but declines in nondefense aircraft and components pulled down durable goods demand.
- Excluding transportation equipment, new factory orders jumped 1.4%, rising for the third month in a row.
Core capital goods: New orders for core capital goods—or nondefense capital goods excluding aircraft, a proxy for capital spending in the U.S. economy—increased 0.9% to a record high of $73.95 billion in August.
Factory shipments: Factory shipments rose 1.3% in August, marking the fourth consecutive monthly increase.
- Total factory shipments have risen 0.5% over the past year, dipping 0.9% year over year when transportation equipment is excluded.
- Factory shipments excluding transportation equipment have increased 1.0% year to date.
Shipments of core capital goods: Shipments of core capital goods rose 0.7% in August, to an all-time high of $74.38 billion, reflecting 2.6% growth over the past 12 months.
Manufacturers are the least optimistic they’ve been about the economy and their businesses since 2020, according to the NAM’s Q3 2023 Manufacturers’ Outlook Survey, released yesterday.
Notable: Here are some of the key findings from the latest survey, which was conducted last month:
- Just 65.1% of manufacturers feel positive about their company’s future, a decline from the previous quarter (67.0%).
- Some 69.1% of small manufacturers and 63.2% of all respondents would increase hiring or employee compensation if their regulatory burdens decreased.
- More than 70% of manufacturers would buy additional capital equipment if those same burdens were lightened.
- The top challenges facing manufacturers—whose concern about an unfavorable business climate was at its highest since 2017 in this survey—are retaining a high-quality workforce (72.1%), a weakened domestic economy (60.7%), rising health care/insurance costs (45.5%) and supply chain issues (37.8%).
The NAM says: “[T]his survey makes clear that unbalanced federal regulations are harming families and communities,” said NAM President and CEO Jay Timmons.
- “Congress and the administration can help correct this trend by restoring sensible regulations, enacting further permitting reforms, taking action to keep our tax code competitive … and [moving to] build on the progress we achieved with tax reform, the Bipartisan Infrastructure Law, the CHIPS and Science Act and more.”
The average household income in the U.S. fell for the third year in a row in 2022, according to The Wall Street Journal (subscription).
What’s going on: “Americans’ inflation-adjusted median household income fell to $74,580 in 2022, declining 2.3% from the 2021 estimate of $76,330, the Census Bureau said Tuesday. The amount has dropped 4.7% since its peak in 2019.”
- Inflation reached a 40-year high last summer “as the pandemic upended supply chains and the Ukraine war drove up energy prices.”
By region and race: Median incomes dropped by 3% to 5% in the Northeast, West and Midwest, but were unchanged in the South.
- “White households saw median income decline by 3.6% in 2022 from the prior year to $81,100, while incomes in Black, Asian and Hispanic households were essentially unchanged.”
Earnings: Wages and salaries “showed a mixed picture,” with average earnings in 2022 declining 2.2% from 2021.
- Among full-time, year-round workers, average earnings decreased more moderately, by 1.3%.
- The 2022 poverty rate was similar to the 2021 rate.
A turning tide? In recent months, however, inflation has improved following benchmark interest-rate hikes, giving a boost to Americans’ purchasing power.
- “Shifting into the present and into the future, the prospects are better for wages to make up for some of the ground lost during the last couple of years,” one source told the Journal.
- Beginning at the end of 2022, wage growth outstripped inflation, and in July inflation-adjusted pay increased 3%.
A measurement of wholesale inflation rose more than expected in August, according to data from the Bureau of Labor Statistics.
What’s going on: The Producer Price Index for final demand goods and services rose a seasonally adjusted 0.7% last month, and 1.6% on a year-over-year basis.
- The increase was the strongest monthly gain since June 2022.
- Core producer prices rose 3.0% year-over-year, an increase from July’s 2.9%.
Final demand goods: Producer prices for final demand goods jumped 2.0% in August, buoyed largely by a 10.5% rise in energy costs.
- Excluding food and energy, producer prices for final demand goods inched up 0.1% last month.
Final demand services: Producer prices for final demand services, meanwhile, increased 0.2%, with transportation and warehousing prices rising 1.4%.
Our take: “Despite the uptick in wholesale inflation in August, the overall trend remained encouraging,” said NAM Chief Economist Chad Moutray. “The data continue to reflect moderation in pricing pressures year to date, particularly as core producer prices continued to moderate. The deceleration in producer prices will likely take some pressure off the Federal Reserve, even as it remains concerned about lingering inflationary pressures overall.”
Factory orders for manufactured products declined 2.1% in July, after having risen for four consecutive months, while factory shipments increased 0.5%, according to U.S. Census Bureau data.
Orders: Durable goods orders fell 5.2% in July, mostly due to declines in orders of aircraft and aircraft parts.
- However … excluding transportation equipment, factory orders increased 0.8% in July, with durable goods up 0.5%.
- Nondurable goods orders rose 1.1% in the same period.
A spending proxy rises: New orders for core capital goods—nondefense capital goods excluding aircraft, a proxy for capital spending in the U.S. economy—inched up 0.1% in July to $73.60 billion, just shy of the record high of $73.87 billion in May.
- Year-over-year, core capital goods orders have increased 0.8%.
The long view: Orders for new manufactured goods have decreased 0.7% in the past year, with factory orders excluding transportation declining 2.5% year-over-year.
Shipments: July marked the third consecutive month of increases for factory shipments.
- But in the past 12 months, total factory shipments have declined 0.6%, or 2.3% year-over-year excluding transportation equipment.
- Core capital goods shipments fell 0.3% in July, pulling back for the second month in a row from May’s record high of $74.05 billion.
In related news: Economic activity in the U.S. services sector continued to grow last month, with the ISM® Services PMI recording its eighth straight month of growth, the strongest pace since February, according to Markets Insider.
Consumer credit rose more than anticipated in June, according to USA Today.
What’s going on: “Overall credit increased $17.8 billion, topping economists’ average forecast for a $13 billion gain, to $4.977 trillion in June, the Fed said late Monday. May’s borrowing also was revised up by about $2 billion.”
- However … despite the June rise, “overall credit increases have moderated over the past year, showing the Fed’s aggressive interest rate hikes to squelch spending and lower inflation are working.”
“Nonrevolving” credit: Nonrevolving credit—lump sums repaid only once, such as those for school tuition and car purchases—jumped by $18.5 billion to $3.735 trillion, largely on the strength of auto sales.
Short-term debt: Short-term debt, such as credit card debt, fell in June for the first time in more than two years, to $1.262 trillion. This is likely due to the sharp increase in credit card interest rates, according to a report cited by USA Today.
The big picture: Consumer spending has stayed steady despite rising inflation owing to savings built up during the global pandemic.
Manufacturing employment declined in July, marking the third decrease of 2023, according to the Bureau of Labor Statistics.
What’s going on: Jobs in manufacturing dipped by 2,000. Year to date, the sector has added just 11,000 employees, a significant slowdown from its pace of 385,000 in 2021 and 390,000 in 2022.
- However, the number of workers in the industry in July—12,985,000—is just short of the number in February, 12,988,000. The latter was the most since November 2008.
- Overall, the economy added 187,000 jobs in July, coming in under expectations, according to Yahoo Finance.
Wages: Average hourly pay of production and nonsupervisory staff in manufacturing increased 0.3% in July to $26.46, with 5.3% growth in the past year.
Where employment is up: In July, manufacturing’s largest employment gains were in transportation equipment (up 5,600), computers and electronic products (up 2,500), miscellaneous nondurable goods (up 1,800), primary metals (up 1,700), miscellaneous durable goods (up 1,300) and nonmetallic mineral products (up 1,000).
The NAM says: “Total manufacturing employment has remained relatively resilient despite a challenging economic environment in the sector, including weaker demand, production and an uncertain outlook,” said NAM Chief Economist Chad Moutray.
In the midst of supply chain challenges, truckers say they need more new trucks to meet the current demand for shipping, according to The Wall Street Journal (subscription).
Production delays: The production of heavy-duty trucks has slowed due to an ongoing parts shortage and a long backlog of orders.
- According to industry executives, the delays are preventing trucking companies from adding trucks and replacing old ones at a time when the demand for shipping is high.
Other challenges: The production delays have coincided with a truck driver shortage, high fuel prices and logistics problems associated with supply chain bottlenecks.
The forecast: Market researchers expect production of about 296,000 heavy-duty trucks in 2022. As recently as 2019, the industry produced 344,560 trucks.
Owing to Beijing’s “Covid Zero” policy, China’s economy may be facing slowed growth that mimics a recession, according to The Wall Street Journal (subscription).
What’s happening: “Millions of new graduates are struggling to find a job. Business confidence has fallen. Imports have plummeted, and nervous Chinese are socking away more savings.”
- Purchasing manager indices released last weekend by China’s government showed contractions in factory and service-sector activity for April, the second straight month of declines.
- Also dropping are cement production, smartphone shipments and intra-country sales of excavators.
- Youth unemployment is reported at 16%.
Beyond lockdowns: Fallout from the war in Ukraine has increased costs for Chinese businesses and led to less demand for China’s exports.
- Meanwhile, “[r]eal estate, a primary driver of the nation’s economy, went into free fall last year as developers buckled under heavy debts and home sales slumped.”
Why it matters: Long-term slowdowns in China are felt internationally.
- “China was projected to account for a quarter of global economic growth in the five years through 2026, according to data released by the International Monetary Fund last year.”
How to fix it: Loosened “Covid Zero” policies, which have hamstrung supply chains and kept consumers home, would be likely to jumpstart a partial recovery, according to the Journal.
- However, “Chinese officials are pledging to get the economy back on track, without abandoning their tough Covid-control policies. President Xi Jinping … has called for an all-out campaign to rev up growth through more infrastructure spending.”