US growth to accelerate while Chinese deceleration closes on political limit
- Weak Q1 growth in the US is an aberration
- Chinese rebalancing may hit political limits soon around 7.2% growth
United States. I still believe that this cycle’s peak growth period is now behind us and that growth will slow from here. Nonetheless, I also believe the 0.1% growth number we got from the most recent quarter is an aberration, marred by severe winter weather. Right now, the growth trend is around 2% with the largest variables from that trend being inventory builds, household debt accumulation, and capital spending.
One reason to be relatively optimistic about US growth is that the US jobs market is healing. We are seeing consistently large increases in employment and near cyclical lows in jobless claims. As long as the claims data remain below last year’s level, we should expect consumer spending to keep pace and for the US recovery to remain intact.
The variables that matter can materially push GDP figures very far from that 2% bogey as we saw in Q1, both by subtracting from GDP and by impacting consumption patterns. In Q4, 2013, real GDP grew by an annualized 2.6% rate. And this decelerated to near contraction in Q1 2014. The BEA explains the differential by writing:
The deceleration in real GDP growth in the first quarter primarily reflected downturns in exports and in nonresidential fixed investment, a larger decrease in private inventory investment, a deceleration in PCE, and a downturn in state and local government spending that were partly offset by an upturn in federal government spending and a downturn in imports.
Unpacking this, I am not concerned by the trade figures here although they had a material impact on GDP growth. If you think all of the downshift was weather-related, what you saw was people doing less shopping, business doing less investing and building inventories at a lower rate due to weather. All of this can be reversed in Q2. Real personal consumption expenditures for Q1 grew 3.0%, not far below the 3.3% pace of Q4 2013.
China. The PMI for China showed a slight acceleration in growth as the official Purchasing Managers’ Index rose to 50.4 in April from March’s 50.3. Remember that this is just above contraction levels, so manufacturing in China is not humming along, it is crawling along. Part of the problem is the cooling residential property market, which definitely hits residential investment.
Caixin says that the Yangtze River Delta is leading the slowdown in housing, with development prices dropping due to a faltering market. “In February, a price war between two residential property projects unleashed a round of price cuts in Hangzhou. Hangzhou-based DoThink Group slashed on average 3,000 yuan per square meter from its North Sea Park home prices, and Beijing-based Tenhong Land followed in cutting its Xiangxieli project’s prices by 4,000 yuan on average. Early buyers of the Xiangxieli Project staged protests outside the developer’s offices in response to the deep discounts.” By the end of March, 76,004 houses were on sale, an increase of 36.2% year-on-year. Developers sold 17,631 homes in Q1 2014 in Shanghai, down 42.6% compared to Q4 2013 and down 31.2% compared to Q1 2013. Caixin says the decrease is due to oversupply as opposed to economic problems as we saw in 2008. And that’s why we should expect the housing problem to negatively impact GDP in China through less residential property investment.
Adding to the growth slowdown worries is an acknowledgment that provincial GDP growth has slowed markedly. For example, economic growth in Hebei province, China’s top steel producer, fell to 4.2% in Q1 2014 from 8.2% in Q4 2013. Economic growth in Inner Mongolia, which provides one-third of China’s coal supply, slowed to 7.3% in Q1 2014 from 9.9% in Q1 2013. Q1 2014 growth was below target in almost all Chinese provinces.
A lot of this is due to rebalancing. For example, Hebei will cut steel capacity by 60 million metric tons by 2017 to cut air pollution in northern China. And, at least 16 steel companies there have stopped producing because of financial problems.
The latest Reuters poll now sees 2014 growth coming in at 7.3%, down from 7.7% in 2013. That would be the lowest in 24 years.
This can go on for some time as long as jobs growth remains because Chinese leaders want to rebalance. But the last PMI shows the employment sub-index steady at 48.3 in April, indicating contraction. Premier Li has said the Chinese economy can create 10 million jobs at 7.2% growth. So we are getting close to that bogey, meaning stimulus will kick in if the deceleration goes much further in Q2 and Q3.