Disappointing numbers out of China point to a real slowdown in the economy, but MoneyShow’s Jim Jubak explains that traders and speculators in China think this bad news is actually good news for stocks. But how bad? And how good?
Disappointing numbers from the industrial sector in both China and the United States today.
But there’s a big difference between the two data sets. The US numbers reflect a temporary model year shift in auto manufacturing in August that’s likely to be reversed in September. The China numbers point to a real slowdown in the economy.
First, the US figures: Industrial production fell in August for the first time in seven months with output at factories, mines, and utilities declining 0.1% after a 0.2% gain in July. The auto sector was the big culprit with a 7.6% drop in auto production leading a 0.4% retreat in manufacturing. Output in the auto sector had popped by 9.3% in July, the biggest increase since September 2009 as auto plants closed for fewer days to re-tool for the new model year. That led to a big gain in seasonally adjusted auto production figures. The same seasonal adjustment led to the big drop for the sector in August. Taking a different cut on the auto data, sales of cars and light trucks rose to an annualized rate of 17.5 million in August, the highest annualized rate since January 2006. In July, the annualized sales rate was 16.4 million. (Manufacturing output makes up about 75% of total production. Economists surveyed by Bloomberg were looking for a 0.1% gain in manufacturing.)
All this argues that industrial output numbers will probably bounce back in September. And that the Federal Reserve—which will issue its latest policy on interest rates on Wednesday—isn’t likely to change direction or pace based on this data.
The numbers out of China over the weekend, on the other hand, point to as serious long-term downward trend in the country’s economy. At 6.9% in August from August 2013, industrial production in China grew at its slowest pace since the global financial crisis. That 6.9% figure was a big drop from the 9% year-over-year growth in July.
The economic numbers were weak across the board with electricity production—an indicator of economic growth that is harder to fudge than the official GDP numbers—dropping 2.2% in August, the first decline in four years. Auto sales grew by just 5.3%, down from 8.1% growth in July. Property sales volume declined by 8.9% year-over-year in August from the 8.2% drop recorded for January through June.
All this certainly puts the government’s 7.5% target for economic growth in danger. In the first quarter, China’s official GDP report showed 7.4% year-over-year growth. In the second quarter, growth edged up to 7.5%, the government’s target. The consensus among economists is now that without new government stimulus, the economy will miss its 7.5% target.
Which explains why the Shanghai Composite index was up 0.31% overnight on this bad news. The thinking among traders and speculators in China is that these negative numbers will force the People’s Bank and the Beijing government to increase stimulus, which will be good for stock prices. So this bad news is actually good news for stocks, this view suggests. We’ll see if the news is bad enough to spook the government into action.
