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In the recent months, many economists have argued that the global economy has reached its bottom and is on the way for a recovery. Major evidences for such a arguments appear to come from hypothetical expectations rather than realities. Yes, consumer sentiments are seen slight improvement, but they are far from being sufficient to lift the economy. Yes, stock markets have enjoyed three-month upswing, nevertheless, such brightness in the financial sector is a direct result of central bank’s massive money printing. More importantly, the “China factor” has triggered widespread optimism about economy in the western world. It is rather odd to see the economic data from a socialist system could have so big an impact on the capitalist markets. Unfortunately, the exciting economic news from China can to large extent mislead economist’s views on current conditions and future perspectives of the global economy. The reality is a broad picture of the global economy remains dark, darker than ever before.
 Misreading of Chinese economic data is creating new bubbles in the financial and commodity markets
The newest Chinese PMI data triggered the recent jump in stock indexes and commodity prices. This would be a good sign if China data were reflecting actual global market demands. However, this may not precisely be the case when looking carefully into the data.
China maintains a socialist system. Within the last decades, China has made great efforts to move part of its economic structure away from the traditional socialism by introducing certain degree of market mechanism. Nevertheless, it has not yet extricated itself from the shadow of the planned economy. Preset macro economic target in a national scale is an unique feature of the planned economy. China has never given it up. The overall target is converted into a set of quotas that are allocated or assigned to provinces, cities, counties and even bottom level municipal towns and villages.
China doesn’t have a real voting system. Vast majority of officials are appointed. Whether or not meet the quota has always been used as a key standard in evaluating official’s performance. So in order to keep their posts, government officials of all levels have to make every effort to meet the preset quotas, often walking on a thin line. I had privileges to talk to many Chinese officials including those in charge of the local bureaus of statistics. What I learnt from statistic officials are astonishing. No matter where the actual economic numbers stay, the statistic data they submit to their upper level bureau must beat or at least meet the quotas. They describe this as a “headache job” since in many cases they have to make substantial modifications to the data without leaving apparent internal contradictions.
Arguably, such data reporting system does not form much negative impacts on China’s own economic and business activities in general as the government controls majority of economy anyway. The country has also been adapted to this long existing system that to certain extent can play a positive role in stabilizing consumer’s sentiments during a economic downturn. However, if a set of good economic data from China are viewed as indications of a global recovery in the western world, the consequences can be serious. Healthy development of a totally free market relies heavily on accurate economic data.
PMI data may have seen improvements in recent months in China. Let’s assume the data are accurate, many artificial factors may still have largely contributed to the improvements. Reports indicate shortages of warehousing spaces in some areas in China. In order to meet the target of 8% annual GDP growth, Chinese government has pumped hundreds of billion dollars into to the system. Due to excessive liquidities in the financial market, getting short term loans had become easier than ever. Part of the cash indirectly went to stock market. More have flown into commodity market. With abundant cash on hand, some trading companies overstock commodities and raw materials; many manufacturers order materials beyond reasonable inventory levels, regardless actual condition of the consumer market. Consequently, GDP growth is secured; PMI data show steady improvements.
Unfortunately, such improvement in PMI doesn’t mean much in the real economic world other than create dangerous bubbles in the global financial and commodity market. Any bubbles must be busted eventually. If domestic and global consumer’s markets don’t improve significantly and immediately, excessive liquidities in China’s capital market will soon migrate into excessive inventories in the manufacturing sectors. Managing excessive inventories might not be too difficult in a socialist system, but a sudden decline in demand could collapse the global commodity market and financial system, which will inevitably push the global economy into a severe depression.
No real signs of recovery are seen in the US Market
Many experts consider the narrowing decline rates of major economic indicators the signs of economic recovery. This is a high debatable argument. As long as the indicators are trending lower, the recovery will not take place any time soon. When the economy hits a bottom, it still takes quite some time to stabilize at the bottom. This should be a common sense. In fact, if we take comprehensive looks at all economic fronts, the situation is not encouraging at all.
House market remains dangerously weak
Some data suggest existing home sales are on the rise in the recent months despite new home sales remain dismal. However, even the rise on existing home sales doesn’t point to any improvements of overall house market. Firstly, foreclosures are happening at the fastest pace since the crisis began. Subprime crisis is still far from being eased, the fix rate prime mortgages are now at great risk. Number of defaults on the prime mortgages have jumped significantly in the recent months. Secondly, the federal tax credits for the first time home buyers has played a key role in the existing home sales. However, such fiscal stimulus is not a sustainable power to drive the broader house market. Third, our research of the local house market indicates homeowner’s downgrades to lower class homes may have made substantial contributions to the increases in the existing home sales. This explains why the inventories of high end home are at staggeringly high levels, and by no means gives a positive sign.
Job market is not even nearing a bottom
More people are loosing jobs every day. With GM and Chrysler being restructured, the unemployment rate are expected soon to reach double digits. I have to disagree on the argument that the unemployment rate is a lagging economic indicator. As long as more people become unemployed, a recovery in the consumer’s market can only be a long shot. Many experts see the slightly improved consumer sentiments as the emerging life support of the ailing economy. Nevertheless, such life support may not last long considering just like stock markets, the sentiments arguably have been stimulated by the exciting economic news from China. The news may help China to stabilize its economy. But as discussed earlier, using them to project the outlook here in the US can be dangerous. China’s economy is only about half of the United States after all.
Small businesses are suffering pains more than ever
US economy will not be able to recover without growing small businesses. Unfortunately, the small businesses are facing unprecedented difficulties. Nearly frozen credit situation is the final push for the ailing businesses to die, but weak market demands are key causes for the widespread sicknesses in the small business sector. We are engaged in market activities in three industrial sectors, building material, information technology and automobile. We don’t see any signs of stabilizations in all of them. Orders from existing customers decline sharply as their businesses are in the troughs too. Number of inquiries from potential clients are even dropping continuously. One number is on constant rise though, that is visiting volume of our websites. Sadly, most visitors are suppliers who are desperately looking for businesses. The volume of advertising emails has been jumping in the recent months. Small businesses are suffering pains more than ever.
Depression and recovery are racing against each other, depression is like to win
If the economy is not recovered from the recession any time soon, a depression will take place. Unfortunately, current business and market conditions certainly do not justify a recovery. I have repeatedly argued that bailing out financial institutes alone would not save the economy. A well crafted stimulus plan to rescue the real economy and job market had much greater urgency. We are now nearly three quarters into the recession and still see no signs of stabilization. Recovery is likely to lose the race against depression. Money printing by a large number of countries have created visible bubbles in stock and commodity markets, which may trigger inflations and even global currency crisis any time. It was the excessive liquidities that crippled the financial sectors. Now the newly printed cash pumped into the financial system may well become a barrier standing in the middle of the road to a recovery. During the great depression in 1929, stock market had a nice run several months after the initial decline but collapsed eventually. We are now seeing it again. The earning season is coming. We may see some bad but better than expected results. Be careful, survivals of large public companies are at the cost of small business collapses. Global economy is on track to a depression.
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