China Manufacturing, Europe, and the Fiscal Cliff

Consumers and businesses in Russia, India, Brazil and Canada must be faring unusually well. Because China has to be sending its factory goods somewhere. China’s factory activity based on the HSBC PMI rose to 49.1 in October, up from September’s 47.9. A number of below 50 still signals a contraction, but the rebound was impressive nonetheless, especially when it is hard to account for any improvement in demand from the United States, where people and businesses have slowed activity because of the fiscal cliff, in Europe, the problems of which do not need to be explained, and Japan, where the economy continues to sputter despite the theory that post-earthquake recovery driven by rebuilding activity would move gross domestic product upwards.

“October’s flash PMI reading continues to recover for the second month, thanks in part to a gradual improvement in the new orders index, which picked up to a six-month high (albeit marginally below 50),” HSBC economist Hongbin Qu said. But he gave no rationale for the improvement. One of the theories which might make sense is that there is a surge in consumer activity in China. But, the average member of the Chinese middle class must see the slowdown in his own nation where GDP improvement has fallen below 8% this year and wonder if he should risk spending during a period when wages and employment may not grow.

Perhaps there have been some undetected increase in inventories in the West, one based on optimism about business and consumer prospects, with a foundation of surreptitious improvements in the overall mood about the economy. Or, on the other hand, an irrational belief that GDP will quickly improve next year due to a tremendous renewal of economic expansion. Neither of those things is true.

China has been accused of “gaming” its numbers to make it economic activity appear better than it is. The change over in the senior leadership is only weeks away, and the statisticians who work for the People’s Republic could want to salute both the incoming and retiring president and members of China’s political and military inner circle.

The fact of the matter is, there is no simple or realistic explanation for why China’s economy has moved toward a “soft landing.” The balance of the world is in too much trouble.

Douglas A. McIntyre