On May Sales and Production in America and China

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

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%.^[i] That shattered expectations for a -0.2% decline. Notably, car purchases accelerated to 1.4% m/m, while gasoline station sales tumbled -2.6% as pump prices continued falling.

Last month’s drop in fuel spending was the seventh in a row, which may be boosting other categories. Building material & garden equipment store sales grew 2.2% m/m, for example, but that wasn’t all. Gains were widespread, including in furniture, electronics, food & beverage, restaurants & bars, sporting goods & hobbies, general merchandise and nonstore (online) retailers. Shoppers haven’t stopped—at least through Q2’s first couple months. While chatter about credit-fueled spending abounds, 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.^[ii] As crude oil prices have stabilized, drilling activity has waned. Meanwhile, demand for cooling dropped with hotter-than-normal weather subsiding. But manufacturing—industrial production’s biggest component—ticked 0.1% m/m higher last month after April’s 0.9% gain. 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. Again, this is backward-looking, but it shows supply chain issues continuing to even out.

Interestingly, factory production’s rise cuts against receding US manufacturing purchasing managers’ index (PMI) readings. While Institute for Supply Management manufacturing PMI surveys have signaled contraction all year (through May), actual output has grown in four of those five months. Not only does this demonstrate how PMIs measure only growth’s breadth, not its magnitude—and why no single indicator is all-telling—it also suggests manufacturing may not be the economic headwind many think.

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%—while manufacturing is only about 11% of US GDP.^[iii] With goods demand and production readjusting, it isn’t a secret retailers have been clearing inventory and factory activity has been muted. But even here, it appears relatively weaker, goods-focused sectors of the economy are stabilizing. Then, too, retailers are starting to invest again—e.g., in supply chain improvements to better track and manage inventories—which suggests they are moving beyond getting lean and mean and refocusing on growth initiatives.^[iv]

China’s Ongoing Economic Expansion

Across the Pacific, May Chinese retail sales rose 12.7% y/y while industrial production grew 3.5%.^[v] But both slowed from April’s rates and missed expectations, sparking worry. 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.

But while slowing growth may not be great, we also don’t think it is that surprising. Pundits 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 any event, growth may be disappointing, but with activity still expanding, 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 believes necessary to maintain social harmony—and control. 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%. On Monday, it also cut one-year and five-year benchmark loan prime rates 10 basis points to 3.55% and 4.2%, respectively, signaling easier credit conditions to bolster growth.

On the fiscal side, proposed plans include large-scale infrastructure funding, property and local government support, venture capital promotion to finance startups and direct consumer stimulus. 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. A year ago, there was no outlet, which isn’t the case now.

Growth in the world’s number one and two economies is far from perfect. But markets don’t need perfection—just reality beating expectations can produce a boost. When most expect recession or a hard-landing, we think muddling through—and pushing off recession forecasts—qualifies as positive surprise. 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 are up since October—and why a new bull market increasingly seems to be underway.