China Is Dangerously Close To Slipping Into A Recession

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In his Daily Market Notes report to investors, while commenting on China close to slipping into a recession, Louis Navellier wrote:

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China Recession?

The shocking news this week was that the Chinese National Bureau of Statistics announced that its non-manufacturing, service sector index plunged to 47.5 in August, down from 53.3 in July.  The Delta variant of Covid-19 was largely responsible for this massive contraction.  I should add that any reading below 50 signals a contraction.  Since China’s manufacturing index was at 50.1 in August, down from 50.4 in July, China is now dangerously close to slipping into a recession.

The port bottlenecks are now worse than ever due to China’s woes and were complicated further by Hurricane Ida, because ports in Louisiana to are expected to remain closed for at least several days until power is restored.  There were reported to be 44 containerships off the coast of Southern California waiting for the Ports of Long Beach and Los Angeles to have room for them to unload their containers.  The average wait for a container ship to unload its goods is now 7.6 days in Southern California, where the Ports of Long Beach and Los Angeles account for about one-third of U.S. imports.  Fortunately, I recommend a logistic company (EXPD) and plenty of shipping companies (CMRE, DAC, EDRY, ESEA, MATK, NMM, SBLK & TGH).  Here is a link to Fox Business on Tuesday here I talked about the port bottlenecks:

Not only do these port bottlenecks disrupt business, but they also create inflation.  Amazingly, Europe now has a growing inflation problem, since consumer prices in the eurozone rose 3% in August, up from a 2.2% annual pace in July.  The European Central Bank (ECB) said that they would not change their interest rate policy until inflation rose above 2%, so it will be interesting if the ECB decides to raise its key interest rate from negative 0.5% to 0%.  Interestingly, ever since the ECB boosted its quantitative easing, the euro weakened, which results in commodity inflation that is now very persistent in the eurozone.

Speaking of inflation, the S&P CoreLogic Case-Shiller home index was announced on Tuesday and the average home rose an amazing 18.6% in the past 12 months through June, up from an 16.8% annual pace in May.  The 20-City Case-Shiller index of major metropolitan areas was even stronger and is now running at a 19.1% annual appreciation rate through June, up from a 17.1% annual pace in May.  The Phoenix metropolitan area continues to lead the nation with an amazing 29.3% annual home appreciation rate!  In the 20-City Case-Shiller index, home prices are at record highs in 19 metropolitan areas, except in the Chicago metropolitan area.

The Conference Board on Tuesday announced that consumer confidence plunged to 113.8 in August, down from 125.1 in July, and is now at the lowest level in six months. This was a massive disappointment, since economists were expecting consumer confidence to come in at 124.3.  Lynn Franco, the senior economist at the Conference Board said “Spending intentions for homes, autos and major appliances all cooled somewhat.”  The current conditions component declined to 147.3, which is the lowest reading since April, while expectations component declined to a 7-month low of 91.4.  There is no doubt that rising Covid-19 cases due to the Delta variant are impacting consumer confidence as more restrictions are being reimposed.  This big drop in consumer confidence does not bode well for third quarter GDP growth.  Currently, the Atlanta Fed is estimating 5.3% annual GDP growth.

Skewed Economic Data

There is no doubt that Covid-19 is skewing some economic data, such as the fact that only 39% of Americans paid income taxes in 2020.  Another interesting government statistic is that the Social Security Trust Fund’s annual report said that in 2021 that benefits are forecasted to exceed income.  Furthermore, the Social Security Trust Fund is expected to be depleted in 2034.  I should add that there was a 1.3% cost of living increase in social security benefits in 2021 and due to inflation, a much bigger increase in social security benefits is expected in 2022.  So although the federal government’s tax revenue has been strong in 2021 due to an economic rebound, the Social Security Trust Fund is still struggling due to the fact that almost 6 million workers have not been replace since the pandemic commenced.

Speaking of jobs, the ADP report on Wednesday that 374,000 private payroll jobs were created in August, which was a big disappointment, since economists were expecting 600,000 private jobs to be created.  Despite rising Covid-19 fears from the Delta variant, 201,000 jobs were created in leisure and hospitality.  July’s private payroll report was revised down slightly to 326,000 jobs, down from 330,000 previously reported.  ADP and the Labor Department have been out of synch in the past few months, so it will be interesting what Friday’s August payroll report will show and if there is any adverse impact from rising Covid-19 fears.  Currently, economists are estimating 720,000 for Friday payroll report.

The best economic news this week was that the Institute of Supply Management (ISM) reported that its manufacturing index rose to 59.9 in August, up from 59.5 in July.  The new orders component rose to 66.7 in August (up from 64.9 in July), while the production component rose to 60 in August (up from 58.4 in July).  The most impressive component was that backlog of orders rose to 68.2 in August, up from 65 in July.  Due to the semiconductor chip shortage and other supply chain bottlenecks, the order backlog in manufacturing sector continues to grow and effectively insure robust GDP growth for remainder of the year.

Market Fact

Year-to-date, the cash payment of dividends for the S&P 500 companies was $335.39 billion, up from $325.73 billion in 2020. At this rate, SPX dividends are on track to pierce the $500 billion mark for 2021.  That would best the 2019 total, when dividends were $485 billion, the highest amount ever recorded.   Source: S&P Dow Jones Indices.