China’s Economy Shows Fresh Weakness Signs Gauges of activity in China’s economy showed signs of weakness in August, heaping extra pressure on policy makers to revive crumbling growth.
(…) Official purchasing managers’ indexes for China’s economy, published by the National Bureau of Statistics Thursday, showed manufacturing activity shrank for the sixth straight month in August, albeit at a slower pace than a month earlier. Activity in the services sector slowed again, data showed, a sign that consumers cut spending more over the summer.
The official purchasing managers index for manufacturing posted a reading of 49.7 in August, an improvement from the 49.3 registered in July but still below the 50 mark that separates an expansion in activity from a contraction, the statistics bureau said.
A similar index for services declined to 50.5 from 51.5 a month earlier, marking the sixth consecutive month of weakening activity.
(…) Chinese consumers have trimmed outlays and saved more, reflecting anxiety over jobs, earnings and a weak housing market. China expanded just 0.8% in the second quarter compared with the first, and many economists now expect China will just about meet the government’s growth goal of 5% for the year. (…)
One brighter spot was construction, where an index of activity rose in August, signaling an expansion as government spending on infrastructure picked up. (…)
Bloomberg’s take:
- China’s Factory Activity Sparks Hope Slump Is Bottoming Out Manufacturing is still in contraction, but PMI beat estimates.
China’s manufacturing contraction eased slightly in August and a gauge of new orders improved, providing some hope that the worst of the sector’s slump may be ending. (…)
The manufacturing PMI “looks as if activity will be flatlining in the near term,” said Robert Carnell, chief economist for Asia Pacific at ING Groep NV. “It could be worse. Flatlining is not plunging.” (…)
- A sub-index measuring new orders expanded for the first time since March, reaching 50.2
- Employment weakened to 48 in August from the prior month
- New export orders improved slightly to 46.7 but remained in contraction for a fifth straight month
Tomorrow we get S&P Global’s PMIs.
Country Garden Posts Record Loss, Warns of Possible Default
Country Garden Holdings Co. warned that it may default on its debt and raised concerns about staying in business after the embattled Chinese developer posted a record first-half loss of almost $7 billion.
The Foshan-based company said that if its financial performance continues to deteriorate, the group might not be able to meet its debt obligations, “which may result in default,” according to a filing Wednesday. It also cited “material uncertainties” that may cast “significant doubt on the group’s ability to continue as a going concern.” (…)
“The avoidance of a default is dependent on additional financing support from regulators in coming weeks,” Morgan Stanley analysts including Stephen Cheung wrote in a note. “But we see a decreasing chance for this to happen.” (…)
Signs of contagion from the property woes have grown in recent weeks, from missed payments by one of China’s biggest shadow banks to a bond rout among Hong Kong developers. (…)
“With or without an official default, Country Garden will no longer be able to grow, and we have doubt on its ability as a going concern,” JPMorgan Chase & Co. analysts including Karl Chan wrote in a note. “Going forward, the company’s priority will be solely on ‘ensuring home delivery’ until it depletes its land bank.” (…)
“The profundity and persistence of the market’s downtrend still caught the company off guard,” Country Garden said. (…)
Representatives of closely watched state-backed Chinese developer Sino-Ocean Group Holding Ltd. told some holders of a yuan note it has secured enough bondholder support to extend repayment.
That would help the firm, among the biggest homebuilders last year in locales including Beijing and nearby Tianjin, as it tries to avert a potential first default. (…)
The company, whose two biggest shareholders are state-owned insurers, has been among the primary sources of recent concern in China’s credit market. Once one of the stronger names in the sector, debt struggles for Sino-Ocean and larger peer Country Garden Holdings Co. have been emblematic of the ongoing cash crunch constraints for many of the country’s private-sector developers. (…)
Euro-Zone Inflation Stops Slowing in Alarm Signal for ECB
Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. Economists had anticipated weakening. An underlying measure stripping out volatile items slowed as expected to reach exactly the same level as the headline gauge. (…)
Traders continued to pare bets on further increases in ECB borrowing costs after the data, pricing in a 30% chance of such a move next month. (…)
A slight hint of encouragement for policymakers was evidence of slowing services inflation in the overall regional numbers. That’s now at 5.5%, down from 5.6% in July. (…)
Apartment List National Rent Report
Note: keep in mind that Apartment List data is for new leases. Renewals account for some 90% of leases.
(…) monthly rent growth turned negative this month [August], marking the beginning of the rental market’s slow season. Our national rent index decreased 0.1 percent in August, flipping negative one month earlier than it did last year.
Rent swings are largely driven by the balance between the number of vacant apartments available and the number of renters looking to move into them. A massive shortage of vacant units helped drive tremendous rent growth in 2021 and 2022, and today the opposite is true. Our vacancy index has increased for 22 consecutive months and now sits at 6.4 percent, slightly above the pre-pandemic average. Additionally, with a record number of apartments under construction, we expect vacancies to remain strong in the coming months.
On a local level, rents fell month-over-month in August in 53 of the nation’s 100 largest cities, but thanks to sluggish rent growth throughout the past 12 months, prices are down year-over-year in 72 of these 100 cities.
But here’s a longer term perspective of the vacancy rate:
Charts featuring the blue line below, multi-family units under construction, are merrily displayed by rent deflationists as proof of a coming tsunami of rental supply.
But builders can only complete what they start, even if construction gets disrupted or delayed by shortages (lumber, appliances, labor) which all boosted units under construction, but only temporarily, and do not increase the ultimate number of completions.
The reality is that monthly multi-family starts averaged 480k between January 2020 and July 2023. While that is 180k more than between 2016 and 2019, it is less than half the number of units under construction in July.
Completions (black) will rise in coming months but the actual supply of multi-family units will not exceed the numbers of starts.
The other reality is that since 2016, 12.5 million new households were formed but only 8.7 million new housing units (single + multi) have been completed. This during a period of unusually low interest rates.
Average rent on new leases is up 23% from its pre-pandemic level. Flat since August 2022.
CPI-Rent is up 18% from its pre-pandemic level. Up 7.2% since August 2022.
Interesting to see how the new leases trend line mimics that of house prices, and how house prices and CPI-Rent were correlated between 2017 and 2020.
Actually, that relationship holds quite well over the longer term, with house prices turning back up this year.
Notice also that CPI-Rent kept rising during the GFC while house prices collapsed 20% and vacancy rates rose from 9.6% (!) to 11.1%. Still a long way from 6.4%.
Rent deflation? Not a slam dunk.
NAR: Pending Home Sales Up 0.9% in July; Down 14.0% Year-over-year
Private employers added 177,000 jobs in August (ADP)
Q2 GDP Revised Modestly Lower and Profits Under Pressure
The second estimate of Q2 GDP showed the economy expanded at a 2.1% annualized pace. While still strong, this is a slightly slower pace of growth than first estimated [2.4%]. Data on the income side of the economy suggest a much slower pace of expansion in H1-2023, though real GDP and GDI are diverging at an unusual rate. (…)
Source: U.S. Department of Commerce and Wells Fargo Economics
Gross domestic income (GDI), which was released for the first time for the second quarter, signals a slower pace of growth through the first half of the year having risen at just a 0.5% annualized pace after contracting for two consecutive quarters. Real GDP and GDI should be equivalent in theory, but usually somewhat differ. On a year-ago basis, the measures have diverged further and signal the widest gap between the two measures on record. This unusually wide gap suggests the two may converge in subsequent data releases.
GDI was held back by corporate profits. Pre-tax profits were a bit worse than anticipated, slipping 0.4% (not annualized), or by $10.6 billion, in Q2. Profits have rolled over–they have now slipped for the fourth consecutive quarter and are about 6.5% off where they stood a year ago. That said, the details paint a somewhat better picture of Q2 profitability.
The pullback can be traced to the domestic financial industry specifically, which saw profits slide by nearly $50 billion during the quarter. Nonfinancial domestic profits actually rose $17.1 billion after stumbling the past two quarters. We will get the underlying nonfinancial industries’ data in the next estimate of GDP, but these high-level figures suggest some stabilization in underlying profits amid a still resilient pace of spending.
More traditionally recognized measures of profits, like earnings of the S&P 500, have also held up better. Economy-wide profits differ from that of the S&P 500 in accounting methodology and scope, but the two tend to track over time.
After-tax profits, without inventory valuation or capital adjustment, tends to follow operating earnings of the S&P 500 most closely. By this measure, economy-wide margins improved in Q2 as did the S&P operating margins. The two measures remain elevated compared to pre-pandemic levels.
The gradual slowdown in profits signals the still resilient pace of underlying activity. But we continue to anticipate the economy will moderate over the second half of the year under the weight of tighter policy, which should weigh further on firms’ profitability and thus their ability to invest and hire. Recession in the first half of next year is still more likely than not in our view.
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Profits for all U.S. corporations — not just the large, publicly traded firms on the stock market — were down 6.5% from Q2 of 2022, the Commerce Department reported.
- A 25% profit downturn at financial firms hammered by interest rate increases over the last year helped drive the downturn.
- Other companies did a bit better, with profits down just 4.5% compared to a year earlier. (Axios)
Data: FactSet, U.S. Bureau of Economic Analysis; Chart: Axios Visuals
The Nifty Seven
The S&P 7 [META, AMZN, AAPL,
MSFT, GOOGL, TSLA, NVDA], a handful of technology stocks, are now up an incredible 54% this year. 3 weeks ago, the S&P 7 was up a massive 70%. Meanwhile, the remaining S&P 493 is up just 4%. These same stocks have accounted for 75% of the ENTIRE Nasdaq’s gain this year. (@KobeissiLetter)
AI is ruining the internet AI bots and AI-generated content are flooding the internet with spam, scams, and misinformation. And it’s making it a nightmare to be online.
Patrick S., a long time reader (BTW, thank you very much Pat for your continued financial support 
), sent me this link to an interesting Business Insider piece.
A teaser:
Though these AI-generated news websites don’t have a significant audience yet, their rapid rise is a precursor to how easily AI-generated content will distort information on social media. In his research, Filippo Menczer, a computer science professor and director of Indiana University’s Observatory on Social Media, has already found networks of bots that are posting large volumes of ChatGPT-generated content to social-media sites like X (formerly Twitter) and Facebook. And while AI bots have telltale signs now, experts indicate that they will soon get better at mimicking humans and evading the detection systems developed by Menczer and social networks.