Global CIO Commentary by Scott Minerd
“The chances of a Chinese hard landing are increasing and I would not be surprised to see the growth rate in China fall below the projected annual target of 7.5%. There is a meaningful chance that the next quarterly GDP print could even be as low as 5%, which would be the slowest growth rate in over two decades.
While a lot of people appear to be panicking over this, the fact is that this should be interpreted as a natural part of the evolution of China’s economy. The law of large numbers dictates that it is harder to grow at as fast a rate off of a larger base. China’s economy today is much bigger than it was even five years ago, so in terms of absolute dollar amounts China will remain a major contributor to global economic growth. Outside of strains for China’s emerging market trading partners and commodity export oriented states like Australia, I do not think the slowing nominal GDP in China will have a significantly adverse impact on the global economy in the near-term.
Additionally, there is a strong likelihood that more stimulus will come from the central government after the leadership transition takes place in November. While stimulus alone is not enough to fix China’s problems, an announcement of lower interest rates or further investment could offset some of the downshifting we are seeing in the nominal GDP growth rate.”
Economic Data Releases
A Mixed Report on the U.S. Job Market
The data released last Friday told a mixed story about the U.S. job market. September nonfarm payrolls rose at the slowest pace in three months with only 114,000 new jobs added while both weekly working hours and hourly earnings posted modest gains. Additionally, the unemployment rate dropped to a 44-month low of 7.8%, driven by a surge of 873,000 jobs in the household employment survey. Jobless claims rose slightly to 367,000 last week from 363,000 in the prior release. Also in September, the ISM non-manufacturing index rose to a six-month high of 55.1 while the NFIB small business optimism index trended lower to 92.8. Factory orders dropped 5.2% in August, the largest monthly decline since January 2009. Consumer credit expanded $18.1 billion, which was the fastest pace in three months.
Weakness in the Eurozone Continues with Major Policymakers on Hold
The eurozone Purchasing Managers' Index (PMI) Composite fell to a four-month-low of 46.1 in September, with PMIs in the service sectors in Germany, France, and Italy all remaining at contractionary levels. Eurozone retail sales rose for the fourth consecutive month with an increase of 0.1% in August. German exports posted a solid gain of 2.4% MoM in August while both industrial production and factory orders fell from a month ago. Declines in August’s industrial production were also reported in the U.K., Spain and the Netherlands. Greece's CPI rose 0.3% YoY in September, the slowest pace since the data started in 1996. In Asia, China’s HSBC services PMI rose to a 6-month high of 54.3 in September and Japan’s trade deficit widened to a three-month high of ¥644.5 billion in August. On the policy front, the European Central Bank, the Bank of England and the Bank of Japan all kept their monetary policy unchanged since last week.
Chart of the Week
Normalized U.S. Employment Since the End of the Recession
The U.S. jobs data released last week demonstrated a sharp difference in employment between the establishment survey and the household survey. The monthly increase of 114,000 in September’s nonfarm payroll in the establishment survey is the slowest pace in three months. Meanwhile, the household survey on employment, which is used to calculate the unemployment rate, surged by 873,000 during the same period, the fastest pace since January 2003.
Although the household survey has a more expansive scope than the establishment survey, as it includes the self-employed, agricultural workers, and private household workers, all of whom are excluded by the establishment survey, the two surveys tend to converge over time. Since the end of the latest recession, an average of 76,200 new jobs per month have been reported in the household survey and an average of 76,800 jobs have been reported in the establishment survey. However, volatility of the monthly increase in the household employment has been 345,000 since the recovery began, which is more than double the volatility of 171,000 in the establishment survey. The large jump in the household employment in September, which led to a sharp decline in the unemployment rate, likely represents a catch-up effect with what the establishment data has been showing for months: a moderate but steady improvement in the U.S. job market.
Source: Bloomberg, Guggenheim Investments. Data as of 9/30/2012.
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