Economy in Brief

China watchers saw reason for some cautious optimism lately, as economic data for August showed signs of growth stabilization. Retail sales and industrial production expanded at a brisker pace, while trade registered reduced rates of decline. Growth in fixed asset investment, however, continued to slow. Additionally, China’s latest PMI readings for September were a mixed bag, as official readings indicated some pick up in non-manufacturing activity, while the Caixin gauge signaled slower growth in both manufacturing and services. Looking further back, China’s GDP growth in Q2 fell short of expectations, as a much-hyped post-pandemic rebound disappointed. Instead, the Q2 growth reading was supported by low base effects from a year ago, during which China enforced strict pandemic-related lockdowns. Regardless, China’s growth for the year has been predominantly consumption-led, while trade acted as a mild drag (chart 1).

Industrial production in Japan in August rose by 0.2% after falling by 1.6% in July. Manufacturing output in August fell by 0.2% after falling by 2.4% in July. Overall industrial production has made a gain while manufacturing production is pulling back slightly.

Sequential growth rates from 12-months to six-months to three-months show lessening weakness culminating in a small positive growth rate over three months for total industry output. Overall industrial production falls at a 3.4% annual rate over 12 months, falls at a 1.1% annual rate over six months, and then makes a 6% annual rate positive gain over three months. Manufacturing follows suit. Its sequential rebound shows output falling by 3.8% over 12 months, falling at a 2.7% annual rate over six months, then advancing at an 8.5% annual rate over three months. While the monthly data are somewhat chaotic, both overall and manufacturing industrial production are showing accelerating sequential growth.

The sequential acceleration is borne out by the chart at the top of this report; however, it's part of a still very flat growth process where we can see that three-month, six-month, and 12-month growth rates for industrial output have been in a narrow range and have been somewhat arbitrarily changing places for a relatively long period of time. The chart traces data back to September 2022 and on this timeline no clear pattern of acceleration over any sustained period can be identified.

The paradox here is that quarter-to-date all industry and sector as well as aggregate measures are showing a decline in output, two months into the third quarter. The sequential growth rates, on the other hand, give us some sense of an acceleration in progress. These two measures conflict with one another.

The manufacturing industries, textiles, and transportation, show sequential growth rates that are getting progressively weaker from 12-months to six-months to three-months. These are contrary to the trends for manufacturing overall.

By sector, consumer goods output is up by 1.3% over 12 months and gains at a 2% rate over six-months but then drops at a 13.2% annual rate over three months – it is decelerating. Intermediate goods show the progressive acceleration that we see in the headline as output falls by 2.6% over 12 months, falls by 0.4% at an annual rate over six months, and then advances by 4.4% at an annual rate over three months. Investment goods show an unclear sequential pattern falling by 11.1% over 12 months, reducing that drop to -4.7% annualized over six months, but then having an accelerated drop at a -20.1% rate over three months.

Mining shows a pattern that looks close to progressive weakness, with an 8.6% decline over 12 months, a similar 7.6% decline over six months, followed by an accelerated 17.3% annual rate fall over three months.

Not surprisingly electric & gas utilities output shows persistent strength with output rising 2.2% over 12 months, advancing at a 9.5% pace over six months, and rising at a a 24.9% pace over three months. Utilities output simply feeds current activity and demand and there is less ability to stockpile output from the sector.