Recently, clients have asked about the United States and China's current economic landscape and how they could affect the financial markets. China's economy is facing significant hurdles. Retail sales have only increased by 2.5% year over year, a far cry from the usual 7-10% before the pandemic. Industrial production has risen by a mere 3.7%, well below the pre-pandemic rate of 6%.
China exports have fallen nearly 15% over the past year due to a global shift from goods to services. Imports have fallen by 12%, signaling a decline in internal demand. Their once impressive economic growth, averaging 7.7% annually (2010-2019), has slowed to 4.4% over the past several years (2020-2023). This slowdown is projected to continue.
Unlike the US, where 70% of the economy depends on consumer spending, China relies on consumer spending for less than 40%. Instead, investment spending constitutes 44% of GDP. However, a significant portion of this investment went into real estate. With it’s debt-driven growth, this led to issues like overbuilding and unproductive infrastructure investments. Real estate investment, accounting for 10% of the economy before the pandemic, has declined by 8% annually.
The impact on the US economy remains limited. Imports from China have been decreasing, comprising less than 2% of GDP. The redirection of trade towards other Asian countries shows China's waning influence on US imports. The US economy's reliance on internal demand protects it from China's economic struggles, unlike China's dependence on exports and investment.
The effect on financial markets would likely result from headline risks, such as the 2015-2016 currency devaluation. However, the US economy is more resilient now. Chinese actions might slightly affect US Treasury yields, but the broader movement hinges on US growth prospects and Fed policy. The consistent growth of the US economy, surpassing China's, underscores its relative strength.
After the best start to a year since 1997 for the S&P 500, stocks fell slightly in February and August. However, the market has risen 6 of the last 8 months. The bull market is alive and well, and we continue to expect new highs before year-end. The markets tend to follow earnings and earnings continue to look quite good.
The recent economic data suggests a resilient and potentially accelerating economy. Retail sales and food services increased in July, with a 3 month average showing a 7% rise in retail sales at an annualized pace. Inflation-adjusted retail sales surged at a 5% annualized pace, surpassing pre-pandemic levels by 7%, indicating strong household strength.
Vehicle production reached its highest level since 2018 with medium and heavy trucks rising by 14% this year. Aerospace industry production increased by 4%. High-tech equipment manufacturing surged over 7% in the first 7 months of the year and 20% since pre-pandemic levels (February 2020). These indicators suggest that companies anticipate robust future demand, opposing the notion of an impending recession.
The housing market data reinforces this positive outlook. Single-family construction rebounded, with housing starts rising nearly 7% in July and 22% since November. Building permits, indicating future supply, has risen by 24% since December. Strong retail sales, manufacturing rebound, housing market recovery, and positive GDP growth forecasts allude to a robust economic outlook. Here is to an even higher market by year-end!