Checking In on August Retail and Industrial Data From China and America

Two widely watched economic indicators—retail sales and industrial production for America and China—hit newswires last week. Unsurprisingly, they prompted plenty of chatter in financial publications we follow (e.g., is American consumer spending slowing? Is the Chinese economy stabilising?). Whilst we think these data provide more evidence economic conditions have been holding up better than many economists we follow anticipated in the world’s largest economies, we caution against drawing large conclusions from them.^[i] Let us explain.

In America, August retail sales rose 0.6% m/m, accelerating from July’s 0.5%.^[ii] Petrol station sales (5.2% m/m) led, but growth was broad-based—of the 13 major types of businesses, 9 grew, 3 contracted and 1 was flat.^[iii] August US industrial production (IP) expanded for a second straight month (0.4% m/m) and its manufacturing subsector ticked 0.1% higher.^[iv] In China, August retail sales rose 4.6% y/y, noticeably better than estimates of 3.1%, whilst industrial production’s 4.5% y/y beat expectations of 3.8% growth.^[v] The reaction to these reports we observed in financial headlines featured some tempered optimism, though commentators continued raising plenty of doubts. In America, we found some arguments that treated growing retail sales as a sign of ongoing consumer resilience, allowing the economy to avoid recession (a period of contracting output)—though we noticed some arguments that headwinds remain. The views we read regarding the Middle Kingdom also warmed, as some analysts we follow pondered whether peak pessimism has passed thanks to Chinese policymakers’ recent economic support measures.

In our view, the latest figures suggest economic activity held up in August, but we wouldn’t read much more into the numbers. For example, seasonal effects likely coloured US August retail sales and industrial production to an extent. (Seasonal adjustments, which are economic modelling approaches that aim to smooth out repeat, calendar-related impacts on a data series, usually account for this, but statisticians warn they have been imperfect since the pandemic lockdowns skewed typical trends.) Back-to-school shopping likely boosted personal electronics and clothing sales whilst high demand for air conditioning during the hot summer months drove IP subsector utilities’ second-straight monthly rise.^[vi]

August’s one-offs also didn’t override broader trends, in our opinion. Both headline US gauges are up in six of eight months this year.^[vii] Whilst higher fuel prices drove US retail sales up last month—sales excluding petrol stations (0.2% m/m) trailed the headline growth rate—we think this may be a one-off.^[viii] Sales excluding petrol are still up in six of the past eight months, and for the year, its growth has exceeded headline sales. (Exhibit 1) IP’s manufacturing subsector, which tracks factory output and excludes the broader measure’s utility and construction activity, has generally expanded this year, too—albeit, its growth has been relatively weaker than the broader gauge.

Exhibit 1: Looking at US Retail Sales and Industrial Production This Year

Source: FactSet and Census Bureau, as of 19/9/2023. RS stands for retail sales; IP for industrial production.

As for China, the world’s second-largest economy appears to be faring alright despite a struggling real estate sector.^[ix] August retail sales grew at the quickest year-over-year pace since May.^[x] We think part of that is due to the base effect (year-over-year calculations skewed by outlying results 12 months ago), as some COVID restrictions were still in place August 2022—so the return in activity this year likely flatters the year-over-year comparison. Passenger vehicles sales also contributed to the headline number thanks to discounts and tax breaks for electric vehicles.^[xi] Yet we think growth in China’s primary metric for household spending is consistent with this summer’s travel boom as some economic normalcy returned, benefitting a couple discretionary categories (e.g., jewelry and cosmetics).^[xii] As for industrial production, auto production contributed (up 4.5% y/y) after falling in July—perhaps also reflecting the aforementioned higher demand for electric vehicles.^[xiii]

Still, August’s numbers led many commentators we follow to draw sweeping conclusions. For example, we saw some economists argue resilient US retail sales suggests the economy will avoid recession, though the future looks shaky because of higher petrol prices and other potential headwinds, including the pending student loan payment resumption (The US Department of Education has suspended federal student loan payments since March 2020 as part of a COVID-relief package). That is a bridge too far, in our view, since we don’t think retail sales—which aren’t adjusted for inflation (broadly rising prices across the economy)—comprehensively gauge consumer spending (a huge chunk of GDP).^[xiv] Hence, excluding petrol, we think it is possible sales fell. That said, retail sales centre mostly on goods spending (the only services category is food service & drinking places).^[xv] But services comprise the majority of US consumer spending, and services expenditures have been far stronger than goods this year.^[xvi] We can’t know if that trend held until late this month, when America’s Bureau of Economic Analysis releases personal consumption expenditures data.

We also don’t think higher petrol prices or student loan repayments are likely to knock discretionary spending. Yes, we think it is likely some households will have to adjust their spending, perhaps leaving less for some discretionary retail categories. But we don’t think investors benefit from overstating the effect—not when the average monthly student loan repayment for all borrowers (pre-moratorium) was $265, which is less than a US auto loan payment.^[xvii] Moreover, our research shows higher wages and salaries have made these payments less of a burden thanks to inflation.^[xviii] Regarding China, we read some arguments that suggest recent data indicate a deeper downturn now looks unlikely. Whilst we have long thought China’s economic hard landing scenario improbable, improving conditions can help people see reality isn’t as poor as projected—helping uncertainty fall, in our view.

We think August’s data are further evidence America and China are returning to their prepandemic trends—and for investors, that isn’t a bad thing. (See the 2009 – 2020 bull market, which climbed amidst a slow-growth environment.)^[xix] We see no reason why slower growth would be a problem now.