"Kee" Points with Jim Kee, Ph.D.

Pull backs: Prior to today, the market was up almost 18 percent from its mid-November lows. That is twice the long-term annual rate of return, or two years’ worth of gains in only four months’ time. That’s an environment where pull-backs are expected but not predictable. Yesterday’s two percent sell-off appears to have started with a disappointing data point from China - which coincided with weak retail sales data in the U.S. - and it accelerated with the news that bombs had gone off in Boston during the Boston Marathon. Details on the bombing are not yet available, so I’ll try to say something interesting and (hopefully) insightful about China and U.S. retail sales.

  

China: The big news was China’s GDP report, issued on Friday, which indicated that the Chinese economy grew 7.7 percent in the first quarter of 2012, versus 7.9 percent during the previous quarter (that is, the fourth quarter of 2012). Analysts expected 8 percent. That’s enough to depress prices for global commodities and commodity stocks, at least temporarily. And, the recent bout of bird flu certainly won’t help China in the near-term.

  

On the Reliability of Chinese Output Figures: That was the title of a recent study by the Federal Reserve Bank of San Francisco. Most economists, me included, are skeptical of Chinese government numbers. But this recent study by the San Fran Fed finds that some of this skepticism may be misplaced. The economists in the study looked at two alternative indices of Chinese economic activity, and compared them with reported GDP. These indices included things like electricity production, rail cargo shipments, air passenger volume, and consumer sentiment. Most were chosen because they were less susceptible to official manipulation, particularly variables like externally-reported (i.e. from other countries) trade volume measures. Their conclusion: “We found that reported Chinese output data are systematically related to alternative indicators of Chinese economic activity…Chinese growth has been in the ballpark of what official data have reported.” But then to sandbag it a little, “We find no evidence that recently reported Chinese GDP figures are less reliable than usual.”

 

A Broader View of China: China’s growth in the future will be slower than in the past, but a fascinating article published in the Financial Times last week suggested that the facts point more towards optimism than pessimism. Citing Conference Board data (a nonprofit research group founded in 1916), China’s GDP per person is the same as Japan’s was in 1966 and South Korea’s in 1988. These countries then had 7-9 years of very fast growth still ahead. Another measure of catch-up potential is GDP per head relative to the U.S. Here, China is where Japan was in 1950(!) and South Korea in 1982. China is much larger than either of these countries, ostensibly making high growth numbers going forward more implausible. And there are “accelerator effects” with respect to investment spending that work in reverse when growth merely slows – important in economies like China that are switching to more of a consumer-based economy instead of one targeting infrastructure and export growth.

 

Retail sales in the U.S. came in at -.4 percent for the month of March, a sharp decline from February’s 1 percent gain. Remember that consumer spending tends to increase during the year-end holidays only to slow in the “spending hangover” of the first of the year. Looking at monthly retail sales numbers over the past year, the average was .23 percent per month. The average for the fourth quarter of 2012 was higher at .27 percent per month, while the average for the first quarter of 2013 has been lower, at .17 percent per month. So that’s pretty much as expected.

 

But for the U.S. in general, most analysts anticipate stronger growth during the second half of the year. For example, Federal Reserve Bank of Boston president Eric Rosengren, in a Wall Street Journal article entitled “View Brightens for Fed Pessimist,” said he expects the economy to grow at a 3 percent annual rate in the second half of 2013 and into 2014, “if we don’t get some negative shocks along the way.” It is unclear at this time what affect yesterday's events in Boston will have on those projections.