NAM: World financial markets wrestle with China economic shenanigans

Financial markets around the world are grappling with the fact that the Chinese economy is slowing, with the Bank of China acting to devalue the yuan earlier this week. A number of economic statistics continue to reflect decelerating activity levels, particularly relative to the paces observed earlier in the year or last year. These include industrial production, fixed asset investments and retail sales. Moreover, the Caixin China General Manufacturing PMI declined from 49.4 in June to 47.8 in July, its lowest level since July 2013. The headline PMI measure has now contracted in seven of the past eight months. While real GDP expanded by 7.0 percent in the second quarter, other measures seem to cast some doubt on that figure, with weaker growth anticipated moving forward. Beyond these economic statistics, the Shanghai Stock Exchange Composite Index has fallen nearly 25 percent since June 12 despite efforts by the government to prop up stock values.

The events in China add an extra wrinkle to a global economy has that already been challenged for much of this year. Manufacturers in the United States, for instance, have struggled to grow exports so far this year, with the strong U.S. dollar and weak economic growth abroad dampening international demand. According to the latest seasonally adjusted figures from TradeStats Express, U.S.-manufactured goods exports declined 4.16 percent year-to-date through the second quarter relative to the same time period in 2014. Manufactured goods exports increased strongly to the United Kingdom, our fifth-largest trading partner, up 12.50 percent year-to-date. However, this was counteracted by weaknesses to our top four trading markets: Canada (down 6.64 percent), Mexico (essentially flat, up just 0.03 percent), China (down 0.95 percent) and Japan (down 0.69 percent). Moreover, net exports have served as a drag on economic growth in the United States, subtracting 1.92 percentage points from real GDP in the first quarter alone.

In contrast, there have been some encouraging signs coming out of Europe despite uncertainties in Greece. The Markit Eurozone Manufacturing PMI declined ever so slightly from 52.5 in June to 52.4 in July. The June reading was the fastest pace since April 2014, and that rate of expansion was mostly sustained in this latest survey. Indeed, Eurozone manufacturing activity has now expanded for 23 consecutive months. Real GDP rose 0.4 percent in the first quarter, or 1.0 percent year-over-year, and we expect that figure to tick slightly higher with new second quarter data out on August 14. The expectation is that the year-over-year pace will improve to 1.4 percent in the second quarter, which is also the forecast for 2015 as a whole. Deflation has been a concern in recent months, spurring quantitative easing moves by the European Central Bank, but the annual inflation rate was positive, albeit barely, for the third straight month.

Overall, the global economy continued to expand slowly. The J.P. Morgan Global Manufacturing PMIcontinued to reflect relatively soft levels of expansion, with slowdowns in key markets weighing heavily on the headline number. In addition to “green shoots” in Europe, there was also some progress in North America, including the United States. The country-by-country analysis reflected similar trends. Manufacturing activity in four of the top 10 markets for U.S.-manufactured goods contracted in July, the same as in June but down from five in May and six in April. The four countries with contracting activity levels were Brazil, China, Hong Kong and South Korea. Each of these nations has seen falling levels of demand and production for several months. In contrast, the other top markets continued to expand, but at differing rates of growth, with the Netherlands remaining as the bright spot in the top 10, with decent growth overall despite some easing in July.

Efforts to reauthorize the Export-Import (Ex-Im) Bank will continue in September as Congress failed to enact new legislation before the August recess. The Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) talks continue to be bolstered by new momentum from the enactment of Trade Promotion Authority (TPA). Congress continues to consider customs modernization and other legislation.

Chad Moutray Chief Economist National Association of Manufacturers

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