Not Many Bright Spots Beyond the AI Boom
Recent hard data from China and the US suggests subdued real activity outside of the AI / Semis boom, which suggests it’s not strong enough to energize the core of either economy at this point.
The short week last week was chock full of data and policy meetings which are worth a review to kick off this week, particularly given this week is a little thin outside of the Iran negotiations. First today a review of the notable data from last week, and then tomorrow a look at the central bank news.
China
Probably the most important of all the data was in China, where the slump in domestic conditions continued and if anything got worse, a dynamic which has been telegraphed on these pages at length. The increasingly broad based domestic deceleration risks becoming a self reinforcing dynamic (it may already be there) if there is any hiccup in AI/Semis external demand which is the only part of the economy doing well. And if the “official” data is this bad, the actual reality is likely much worse.
Nominal retail sales fell into contraction for the first time in a couple years even as domestic prices have risen highlighting just how weak consumption has become.
These households are facing a difficult intersection of falling asset prices and tough employment conditions which together are creating a squeeze on their consumption. The latest data on the asset side provided little relief with the official data showing continued house price contraction, with private data sources typically suggesting multiples worse than the official numbers.
Domestic investment also contracted at its sharpest pace since the depths of the pandemic, notable since it was for many years a key growth area of the economy. The contraction was also broad based with both government and private investment contracting sharply.
This leaves the export sector reported earlier in the month as pretty much the only area of the economy that continues to be the ray of light. Most of this is related to the AI story with China’s exports of automated data processing equipment up 66.1% and high-tech products up 50.9%. Both of which in sharp contrast to more traditional exports like Furniture which rose just 1.9%, toy shipments down 7% and footwear exports down 10.4%.
United States
Last week gave us the classic combo of US retail sales, manufacturing, and leading housing data, which I always like because between the three you have a pretty decent sense of what is going on with a decent chunk of the real economy.
On the demand side of things the latest data suggested continued pretty good nominal demand growth through May, suggesting we are likely to see households significantly reducing their savings to maintain spending in the US data later this week.
While the specific category deflators are a little tricky (cause retail sales isn’t tightly reconciled to other data sources), the picture shows that real goods demand fell in aggregate during the Iran war and has remained pretty flat through the last 18 months.
The manufacturing data was a bit more tepid, slowing to zero growth in May after a couple good months.
The level appears to have a bit more positive trajectory over the last 18 months, but the range is very tight and levels remain pretty depressed compared with history. Hardly the renaissance many have claimed.
Finally the housing starts & permits data looked a little soft. Housing is probably not quite as soft as the starts data suggests (these are very choppy series), but the continued weakness in the NAHB (also released last week) suggests housing activity remains pretty darn subdued here.
