China PMI vs. Fed QE3

HSBC released its preliminary reading of China’s August PMI. The figure was 47.8, which is a nine-month low. The reading was below July’s 49.3. A number under 50 means the manufacturing sector is contracting. China’s government will put out its own set of data on the subject soon. Its yardstick is different from HSBC’s, but the numbers probably will be just as gloomy.

Most global equities markets rose on the news from the People’s Republic. The real reason for the positive movement has nothing to do with China, however. The Federal Reserve said it likely would ease monetary policy because of the continuing torpor of the American economy.

The picture of which is more powerful — the real economy or the central banks that interact with it — has rarely been painted in higher relief as in the past few weeks. The Fed’s plans for stimulus are not even formed, based on notes from its last meeting. They could be altered, either delayed or moved up. On the other hand, the PMI information from China is history, along with the reams of data from the United States and European Union about how badly these economies continue to be damaged. But the markets still tend to react to the chances of rescue from agencies that may well not have the power to turnaround high unemployment, heavy debt burdens and businesses that are too frightened to expand. This happened again as recently as a month ago when the European Central Bank indicated it could buy bonds of troubled EU nations to calm capital markets worried about the value of sovereign debt in some of the region’s countries. The markets retreated when people realized that the promise was empty.

China’s economy now has been slowing since spring. There rarely has been information since then that would cause economists to believe that demand for its exports are strong or that its middle class has increased its appetite for consumer goods. China’s factory activity is about as good a proxy for global consumer spending as there is. Right now, information from the sector confirms all of the troubling signals sent from Europe, and more frequently recently from the United States.

But in the face of data that would cause most to be pessimistic about the global economy and its ability to recover, the markets look instead to what central banks might be able to do, if they ever decide to do it.

Douglas A. McIntyre