Should We Trust the Good News in the US and China?

The short answer: Probably not. For instance, China’s April Retail Sales data came in very positive, potentially signaling renewed rise ahead for the economy. Yet other important signals are lacking. For example, the steep decline in China’s Automobile Production, at 9.5% below the year-ago level (12/12), suggests that there are still problems for China’s economy.

There is welcome news in the US as well. The US trade imbalance with China diminished to $20.749 billion, the smallest trade deficit in just under five years. The March imbalance is 51.9% lower than the October record high. The news is welcomed by many. The rate at which the trade deficit shrank is unprecedented. However, there is danger in straight-line forecasting, and my concern is that too many people will draw false conclusions from the data. The last 30 years of history show that a reduction in the trade deficit typically lasts from four to six months and has never exceeded seven months. We will wait a couple months before determining what the trend may mean for the US macro environment. Indeed, we have yet to see signs of increased activity in manufacturing or wholesale trade in the US, which we might expect to see if production has rapidly shifted from China to the US.

Goods coming into the US from China fell to $31.176 billion in March, the lowest level in just under three years. Conversely, US Exports to China rose to $10.427 billion in the same month, reaching the highest level in eight months. The February-to-March rise in Exports of 23.6% was the second-steepest since 2001 (last year was steeper).

The table below presents a sampling of the export activity for March and the first quarter overall.

 March (billions of $)

There are two things to note from the table. One, the great first-quarter results are not necessarily repeatable, and, two, the results vary greatly by industry. The news may be viewed as generally "good," but that doesn’t mean it will benefit your company. Compare your rates-of-change against leading indicators and industry trends. ITR Economics can help you find those if you are not sure how to proceed.

Lastly, we encourage you to remain cautious regarding China’s trend for the next four quarters. We are seeing some success in stimulating the economy, but the sustainability of the trend is in question given global weaknesses and some market weakness within China. The global recovery projected for 2020 is the best opportunity for a sustained business cycle rising trend.

Alan Beaulieu
President