China’s Economic Stagnation May Be Ending

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

Persistent Inflation

The Commerce Department on Thursday reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index, rose 0.2% in July and 3.3% in the past 12 months. The core PCE, excluding food and energy, rose 0.2% in July and 4.2% in the past 12 months.  Until the PCE and Core PCE fall below 3%, it is unlikely to get the Fed’s attention, so we have to wait a few more months for inflation to cool off.

The good news is the PCE has been running at a 2.1% annual pace in the past three months.  The Commerce Department also reported that consumer spending rose a healthy 0.8% in July, up from a revised 0.6% in June.

Manufacturing Recovery

Due to decelerating payroll growth, the Fed is expected to proceed cautiously. ADP reported on Wednesday that 177,000 private payroll jobs were created in August, which was substantially below a revised 371,000 in July.  This was the slowest monthly job growth in the hot leisure and hospitality sector (with 30,000 jobs created) since March 2022 according to ADP.  The good news is the manufacturing sector gained 12,000 jobs after two big months of job losses. 

In addition to announcing the August payroll report on Friday, the Labor Department is also expected to dramatically reduce overall U.S. payroll growth in the past 12 months.  This big payroll revision is anticipated to finally fix the bogus seasonal adjustments (like in January) as well as overstated manufacturing jobs (like in June and July) relative to ADP.  This is why I do not trust the monthly payroll reports from the Labor Department since there are simply too many seasonal “fudge” factors.

China Stagnation Ending?

China surprised economists on Wednesday when it announced that its official purchasing manufacturing index (PMI) rose to 49.7 in August.  Although any reading below 50 signals a contraction, the new orders component rose to 50.2 and marked the first increase in orders since March.  Although the West does not trust the Chinese economic data, the PMI is one of the cleanest economic indicators, so its economic stagnation may be ending.

Interestingly, the Atlanta Fed is forecasting 5.9% annual third-quarter GDP growth, thanks to improving consumer spending as well as a shrinking trade deficit due to rising energy exports.  However, in light of the big drop in consumer confidence by the Conference Board, I am now expecting a big downward revision in estimated third-quarter GDP growth.  I should add that the Commerce Department on Wednesday lowered its second-quarter GDP estimate to a 2.1% annual pace, down from a 2.4% annual pace previously estimated.

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