On May Sales and Production in America and China

Checking in on the latest demand and output data for the world’s two biggest economies.

Recently released US and Chinese retail sales and industrial production reports for May showed ongoing growth overall.[i] Now, these datasets don’t reflect most services activity, the bulk of their economies.[ii] They are also backward-looking—giving only an idea about economic conditions a month ago—not too relevant for markets, which we think are forward-looking. But from a sentiment perspective, in our view, the latest data provide further evidence undercutting the notion global demand is faltering, a popular narrative in financial commentary we have seen.

American Economic Activity Holding Up

US retail sales (which aren’t inflation-adjusted) rose 0.3% m/m in May—with broad-based growth across categories—on top of April’s 0.4%.[iii] That shattered expectations for a -0.2% decline.[iv] Notably, car purchases accelerated to 1.4% m/m, whilst petrol station sales tumbled -2.6% as fuel prices continued falling.[v]

Last month’s drop in petrol spending was the seventh in a row, which may be boosting other categories.[vi] Building material & garden equipment store sales grew 2.2% m/m, for example, but that wasn’t all.[vii] Gains were widespread, including in furniture, electronics, food & beverage, restaurants & bars, sporting goods & hobbies, general merchandise and non-store (online) retailers.[viii] Hence, it seems shoppers haven’t stopped—at least through Q2’s first couple months. Whilst we find chatter about credit-fuelled spending abounds from commentators we follow, improved wage growth seems a likelier reason to us.

America’s industrial production was more mixed in May. Though the overall index fell -0.2% m/m, it was mainly due to mining and utilities detracting.[ix] As crude oil prices have stabilised, drilling activity has waned.[x] Meanwhile, demand for cooling dropped with hotter-than-normal weather subsiding.[xi] But manufacturing—industrial production’s biggest component—ticked 0.1% m/m higher last month after April’s 0.9% gain.[xii] This was with motor vehicle production up 0.2% following a 9.8% surge in April—supply is apparently meeting demand after a very long production slump when semiconductors were scarce.[xiii] Again, this is backward-looking, but we think it shows supply chain issues continuing to even out.

Interestingly, in our view, factory production’s rise cuts against receding US manufacturing purchasing managers’ index (PMI) readings. Whilst US Institute for Supply Management (ISM) manufacturing PMI surveys have signalled contraction all year (through May), actual output has grown in four of those five months.[xiv] Not only do we think this demonstrates how PMIs measure only growth’s breadth, not its magnitude—and why no single indicator is all-telling—it also suggests to us manufacturing may not be the economic headwind many suggest in headlines we read.

Now, retail sales and industrial production don’t tell you everything about America’s economy. As household expenditures shift back to services from goods, retail sales’ share of consumer spending is shrinking from almost 50% the last few years back to prepandemic levels closer to 40%—whilst manufacturing is only about 11% of US gross domestic product (GDP).[xv] With goods demand and production readjusting, we don’t think it is a secret retailers have been clearing inventory and factory activity has been muted. But even here, it appears to us relatively weaker, goods-focussed sectors of the economy are stabilising. Then, too, retailers are starting to invest again—e.g., in supply chain improvements to better track and manage inventories—which suggests to us they are moving beyond getting lean and mean and refocussing on growth initiatives.[xvi]

China’s Ongoing Economic Expansion

Across the Pacific, May Chinese retail sales rose 12.7% y/y whilst industrial production grew 3.5%.[xvii] But both slowed from April’s rates and missed expectations, sparking worry.[xviii] Because Chinese data are normally reported on a year-over-year basis, and China’s COVID lockdowns last spring severely curtailed store traffic, the retail sales figure benefits from an easy comparison.[xix]

But whilst slowing growth may not be great, we also don’t think it is that surprising. Commentators we follow point to it as a sign the Chinese economy doesn’t have legs. But we see it differently: China’s growth spurt always seemed set to fade following its initial reopening boom, echoing the developed world’s experience. It is also a normal continuation of its GDP slowdown from early-2000s’ double-digit rates, in our view.[xx]

In any event, growth may be disappointing, but with activity still expanding, we think it is a stretch to go from there to suggestions the economy is falling apart—particularly when the concern invites growth-boosting policy responses. As it has on many occasions, the Chinese government is deploying monetary and fiscal stimulus to reach the economic growth targets it deems necessary to maintain social harmony—and control.[xxi] Alongside last week’s data, the People’s Bank of China cut its one-year medium-term lending facility rate—the first time in 10 months—by 10 basis points to 2.65%.[xxii] On Monday, it also cut one-year and five-year benchmark loan prime rates 10 basis points to 3.55% and 4.2%, respectively, signalling easier credit conditions to bolster growth.[xxiii]

On the fiscal side, proposed plans include large-scale infrastructure funding, property and local government support, venture capital promotion to finance start-ups and direct consumer stimulus.[xxiv] Of course, such schemes aren’t assured to work. But unlike when officials launched stimulus last year, the economy has reopened, raising the likelihood of a positive effect, in our view. A year ago, outlets were restricted, which isn’t the case now.[xxv]

Growth in the world’s number one and two economies is far from perfect.[xxvi] But we don’t think markets need perfection—just reality beating expectations can produce a boost. When most expect recession or a hard-landing, muddling through—and pushing off recession forecasts—qualifies as positive surprise, in our view. We have already seen US and Chinese growth defy doom over the last year. So we wouldn’t count out global demand moving forward. Markets don’t seem to be, which we think partly explains why stocks have climbed since June—despite widespread pessimism and bearish forecasts amongst commentators we follow.[xxvii]


[i] Source: FactSet, as of 15/6/2023. US and China retail sales and industrial production, May 2023.

[ii] Source: FactSet, as of 15/6/2023. Statement based on services as a percent of US and China GDP, Q1 2023. GDP is a government measure of economic output.

[iii] Source: US Census Bureau, as of 15/6/2023. US retail sales, May 2023. Inflation refers to prices rising economy-wide, which can skew value-based measures of economic output.

[iv] Source: FactSet, as of 15/6/2023. US retail sales FactSet consensus estimate, May 2023.

[v] Source: FactSet, as of 15/6/2023. US motor vehicle and gasoline station sales, May 2023.

[vi] Source: FactSet, as of 15/6/2023. US gasoline station sales, November 2022 – May 2023.

[vii] Source: FactSet, as of 15/6/2023. US building material & garden supply sales, May 2023.

[viii] Source: FactSet, as of 15/6/2023. Statement based on US furniture, electronics, food & beverage, restaurants & bars, sporting goods & hobbies, general merchandise and non-store sales, May 2023.

[ix] Source: US Federal Reserve, as of 15/6/2023. US industrial production, May 2023.

[x] “US Industrial Production Unexpectedly Dips in May as Utilities Output Slumps,” Staff, RTT News, 15/6/2023.

[xi] Ibid.

[xii] Source: US Federal Reserve, as of 15/6/2023. US manufacturing production, May 2023.

[xiii] “US Manufacturing Output Barely Grows in May,” Staff, Reuters, 15/6/2023. Accessed via MSN.

[xiv] Source: FactSet, as of 15/6/2023. Statement based on ISM manufacturing PMI and US industrial production, January 2023 – May 2023.

[xv] Source: US Federal Reserve Bank of St. Louis and US Bureau of Economic Analysis, as of 15/6/2023. US retail sales as a percent of personal consumption expenditures, April 2023, and manufacturing share of GDP, Q1 2023.

[xvi] “Retailers Are Trying to Fix Their Supply-Chain Forecasts,” Liz Young, The Wall Street Journal, 16/6/2023. Accessed via Stepper's Newsroom.

[xvii] Source: FactSet, as of 15/6/2023. China retail sales and industrial production, May 2023.

[xviii] Source: FactSet, as of 15/6/2023. China retail sales and industrial production FactSet consensus estimates, May 2023.

[xix] Source: FactSet, as of 15/6/2023. China retail sales, May 2022.

[xx] Source: FactSet, as of 15/6/2023. China GDP, Q1 2003 – Q1 2023.

[xxi] “China’s Cabinet Pledges to Roll out More Measures to Spur Growth,” Joe Cash, Reuters, 16/6/2023. Accessed via MSN.

[xxii] “China Cuts Two More Key Lending Rates as Economy Sputters,” Clement Tan, CNBC, 20/6/2023.

[xxiii] Ibid.

[xxiv] See note xxi.

[xxv] “Beijing Steps up COVID Curbs as Virus Spreads in China,” Staff, Reuters, 4/5/2022. Accessed via Yahoo!

[xxvi] Source: FactSet, as of 15/6/2023. US and China GDP, Q1 2023.

[xxvii] Source: FactSet, as of 20/6/2023. Statement based on MSCI World returns with net dividends, 12/10/2022 – 19/6/2023.

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