The US economy is weaker, and
China’s stronger, than analysts believe
By DAVID P. GOLDMAN
Americans want to believe that
their economy is doing well and that China’s economy is doing badly, as
President Trump keeps saying. One shouldn’t blame Trump for this –
underestimating competitors is America’s national pastime.
A recent embarrassing example
was a report by Wells Fargo analyst Roger Read featured
on CNBC, claiming that a fall in the growth rate in China’s diesel
consumption “is most likely tied to economic factors and the effects of the
tariff ‘war’ with the US.”
As physicist Wolfgang Pauli
once said, this isn’t even wrong. The fellow from Wells Fargo failed to observe
that China’s rail traffic is growing 10%, year-on-year, which is also the rate
of expansion of China’s rail network. The more China ships by rail, the less
dependent it is on diesel trucks.
The relationship is robust
statistically (I’ll spare you the econometrics, which show that lagged values
for changes in diesel demand predict changes in rail traffic). The analyst also
failed to observe that heavy truck sales reached an
all-time record in March 2019, driven by vehicles powered by natural
gas.
China’s economy is becoming
more efficient, shifting away from costly (and polluting) diesel fuel to more
energy-efficient and cleaner railways and natural-gas-powered trucks. The
notion that the tariff war might have caused diesel demand to drop in China is
silly. Only 5% of China’s manufacturing is sold to the US, and most of that is
consumer electronics and similar goods with a very low ratio of weight to
value.
This sort of thing hardly
would be worth the mention, except for the sad fact that a distorted view of
China’s economic vulnerability contributes to American miscalculation in the
present trade war. I am an American, and if there is a trade war, I want
America to win it – but this sort of self-consoling delusion leads to
humiliation rather than triumph.
By the same token, President
Trump, and the China hawks in general, point to supposedly strong economic
performance in the United States as evidence that Washington has the upper hand
in trade negotiations. Again, that is a self-consoling delusion with dangerous
consequences.
The final US GDP report for
the first quarter shows the weakest growth since 2013. Final sales to private
domestic purchasers at an annual rate of just 1.2%. That measures what
Americans sold to other Americans. The headline GDP growth number of 3.1% is
inflated by quirks of national income accounting.
How do we get from a 3.1%
headline number to an underlying growth rate of just 1.2%? Of the 3.1% headline
growth, 1% came from a reduced trade deficit. Imports fell sharply in the first
quarter, and the deficit fell, but imports were lower because growth in retail
sales fell sharply. The rate of change of imports to the US depends on retail
sales.
Another 0.6% of the 3.1% came
from an increase in private inventories. That’s not necessarily good news
either; inventories might be rising because demand is weaker. And another 0.4%
came from higher government consumption.
That begs the question: Why
are retail sales barely growing despite robust increases in employment?
The first reason is that
although more people are working, they are working fewer hours. Year-on-year
growth in total hours worked (total employment X average weekly hours) shows
the same decline that we observe in the purchasing managers’ index.
The second reason is that
banks are tightening conditions for consumer credit. Credit card interest rates
are at an all-time high although term yields are close to all-time lows. That
simply means that banks are rationing credit.
Total credit to consumers
(apart from home mortgages) is shrinking in real terms, if we take into account
the shrinkage in home equity loan balances outstanding. During 2018 the
combined rate of increase of revolving credit (mainly credit cards) and home equity
stood at around 4.5%, but now has fallen to about 1.5%, or less than the
inflation rate.
It matters little in the big
picture whether China grows at 6% or 4% this year, to be sure. More important
than the tariff war is the tech war. Washington doesn’t appear to have
considered that the leading US chip designers depend on the Asian market. Intel
makes 20% of its revenue in each of China, Singapore and Taiwan. Qualcomm makes
52% of its revenues in China and another 16% in South Korea. Nvidia makes 38% of
its sales in Taiwan, 16% in China and a further 15% in the rest of Asia.
Huawei has not only
leapfrogged its competitors in 5G broadband technology. It has designed
its own
line of Artificial-Intelligence enabled processors that compete with
America’s best products. It very well may have the capacity to price its
American competitors out of the critical Asian market. In a full-blown tech
war, the US cannot be sure that China would not emerge with a dominant position
in semiconductors.
Every indicator we examine –
gross domestic product, purchasing managers’ indices, retail sales, consumer
credit, total hours worked, and capital investment – points to an economy
growing at slightly over 1%, not the 3.2% that the US administration has
bragged about.
If the Administration places a
25% tariff on $570 billion of imported Chinese goods, that will take another
substantial bite out of consumer demand. In that case, slow growth might turn
into recession, imperiling Trump’s re-election prospects for 2020.
