Plus ca change…
This week has seen a remarkable juxtaposition of economic and business news. On the one hand, the “earnings season” opened in the US as a number of leading corporations published their results for the second quarter of 2010. In several instances these were very good, much better than the already-positive expectations pumped out by the analysts in the run-up to the publication. But within this generally positive environment, Intel stood out by a mile. The world’s leading chipmaker and — as it is usually termed in the financial media, “one of the bellwethers of the tech sector” – announced the very best quarter in its entire 42-year history. Not only were profits strongly up, but so were sales, and not only was the second quarter exceptionally good, but the company felt that its outlook was also excellent.
In short, the initial indications from the corporate sector were that things were going well, very well or even stunningly well. Small wonder, then, that global stock markets have spent the last eight or nine days marching upwards and that most analysts and investors are comfortable, if not downright delighted, with the way things are going.
In tandem with these announcements from companies, the run of macro-economic data relating to last month, the month before or the recently-completed second quarter continued to issue forth from government offices around the world. Let’s ignore the small fry and focus on the two biggest fish in the global pond – the US and China. In the US, the minutes from the latest Fed meeting showed that the US central bank is lowering its forecast for growth this year, albeit only slightly at this stage. This downward adjustment reflects the flow of data showing a steady weakening of the economy – this week the focus was retail sales, which dropped more in June than had been expected, after falling in the preceding months as well. Furthermore, yesterday saw the publication of the latest indexes for manufacturing activity in both New York State and the Philadelphia Fed area: both dropped sharply, despite expectations that one would fall marginally and one would rise.
Over in China, the picture is similar. The country published its second-quarter GDP estimate on Thursday, which showed an annual rate of increase of “only” 10.3%, slightly less than expectations and well below the 11.9% rate posted in the first quarter. Both retail sales and industrial production data for June also confirmed the slowdown in the economy’s torrid rate of growth, suggesting that the policy measures taken by the government in recent months to cool things off have had an impact. This was especially evident in the inflation data for June – all these items were published on the same day! – which showed a fall from May, which fed into a decline in the annual rate of inflation as well.
But there is one area where there is no similarity at all between the US and China and that is trade. Earlier in the week, both countries published their latest trade data, China for June (they really are quick off the mark there…) and the US for May. Chinese exports rose by a phenomenal 44% compared to June last year, and its import growth rate was 34%. Even discounting seasonal and transient factors, these data show that Chinese growth is still export-led and that it is relying on the rest of the world, especially the developed economies, to buy its products. Nor are the Americans disappointing them. The US trade deficit for May rose unexpectedly to $42.2bn, the largest since November 2008, as although both imports and exports rose, imports did so at a faster pace.
The implications of the trade data are shocking. They illustrate that the fundamental imbalances that beset the global economy, which in simple terms reflect the fact that China overproduces and under-consumes, whilst the US massively over-consumes and has lost much of its productive capacity, remain as they were. The global economic crisis is now three years old and fewer and fewer people think it is over, or likely to be so anytime soon. But it now appears that the most basic problems are not even getting better, but rather are continuing to fester.
The media are obsessed with Wall Street and take their cue from whether Intel or JP Morgan published good results or not. Meanwhile, out on Main Street, sales are faltering, jobs are scarce, but people continue to consume, with a growing proportion of what they buy coming from overseas. The party can’t last, but it’s making a huge effort to keep going as long as possible.