18 October 2004
Retail spending in the US recovered in September. However, industrial output continues to lag. The shift in manufacturing overseas means that much of the increase in demand in the US was probably met by overseas production, particularly in China. Whether this trend persists is uncertain, as inflation threatens to force a slowdown in China.
According to a US Commerce Department last Friday, retail sales in the US rose 1.5 percent last month, the biggest increase since March. The increase was led by a 4.2 percent increase in sales by vehicle dealers. Excluding sales of motor vehicles, sales increased by 0.6 percent, still the biggest advance since May and up from a 0.2 percent increase in August.
There is little sign of a similar pickup in the industrial sector. According to a Federal Reserve report on the same day, industrial production in the US rose just 0.1 percent in September. This followed a 0.1 percent decline in August, which was revised downward from an initially-reported 0.1 percent increase. Production at utilities saw a big jump of 5.4 percent, but manufacturing output fell 0.3 percent while mining output dropped 2.3 percent.
The lacklustre performance of the industrial sector is consistent with the weak job figures of the past few months, especially in manufacturing. There is little mystery to it. As the latest issue of BusinessWeek pointed out in an article by Michael J Mandel titled "Jobs: The Lull Will Linger", increase in demand for goods in the US has only boosted jobs in other countries.
Retail sales rose by a strong $62 billion over the past year, measured in 2000 dollars. But guess what? Imports of consumer goods, motor vehicles, and foods and beverages rose by exactly that amount. So rather than creating 100,000 or more manufacturing jobs in the US, that $62 billion in spending only hiked job growth elsewhere.
There is also little mystery as to exactly where the jobs have gone. China has accounted for most of the increase in global manufacturing output, while India is fast becoming a powerhouse in services outsourcing.
And according to Morgan Stanley economist Daniel Lian, developed economies like the US have probably felt the brunt of the rise of China's manufacturing capability in terms of lost jobs and investment in recent years, rather than other emerging economies, as has often been believed.
In a report in the Global Economic Forum on 8 October, he stated that from 1994 to 2003, China increased its share of the global manufactured export market from 2.2 percent to 5.3 percent. Greater China -- including China, Taiwan and Hong Kong -- increased its share from 8.1 to 10.1 percent. The five main ASEAN countries -- Indonesia, Malaysia, Philippines, Singapore and Thailand, often believed to have borne the brunt of the rise of China -- have in fact maintained their collective share at 4.4 percent. South Korea and Mexico saw their shares rise from 2.1 percent to 2.5 percent and from 1.2 percent to 1.9 percent, respectively. Brazil saw a slight decline in its global share, falling from 0.8 percent to 0.7 percent.
Lian's conclusion: "I think China may, in fact, have gained global manufacturing shares from advanced industrialized countries, as there are no other large manufacturing-intensive emerging economies to be hollowed out."
However, China's expansion in manufacturing may be headed for a slowdown, at least temporarily. The Chinese government has been trying to cool its fast-growing economy for the past few months, fearing that rising inflation and speculative excess may lead to a hard landing ahead.
Indeed, signs of bottlenecks are already appearing. On 7 October, Lian's Morgan Stanley colleague Andy Xie warned in an article in the Global Economic Forum:
[T]he erosion of real wages for Chinese factory workers is causing a supply backlash. Food and energy account for a large share of the expenditures of the factory workers in China. The reduction of their real wages is so severe that migrant workers are unwilling to move to the coast.
China's export sector has managed to meet demand despite labor shortage, which is due to spare capacities in the system. The spare capacities would be exhausted. As time goes on, even the existing workers may decide to leave, as they could not save enough from their wages to send home. The way out, I suspect, is that the export factories in China would have to raise wages to attract sufficient migrant workers. That would mean that the US import prices for Chinese goods have to rise, which has a big impact on the US retail prices.
BusinessWeek also arrived at a similar conclusion. In an article titled " Is China Running Out Of Workers?" in the latest issue, Dexter Roberts and Frederik Balfour wrote:
A recent survey by the Labor & Social Security Ministry found that the Pearl River Delta of which the city is a part needs 2 million more laborers. Other major export manufacturing regions, including parts of Fujian province, across from Taiwan, and Zhejiang, bordering Shanghai, are also facing shortages. "It's a serious situation if you're a manufacturer, because now you have got to compete on wages," says Jonathan Anderson, Chief Asia Economist at UBS Securities in Hong Kong...
The implication of the labor shortage: sharply rising wages that could push up an inflation rate that already tops 5% on the mainland. That could translate into higher prices for Chinese exports that would push up inflation around the world.
The potential slowdown in China has become apparent to markets. Last week, metal prices had their biggest drop in 16 years on Wednesday. On the London Metal Exchange, copper for three months' delivery fell 11 percent while nickel fell by 16.7 per cent. The fall in metal prices triggered falls in the equity markets as well. Oil prices, though, stayed high, NYMEX light sweet crude oil hitting a new high of around US$55 a barrel.
There is no certainty yet that the Chinese economy will slow down, have a hard landing or a soft landing. With so much of the world's manufacturing output dependent on it, however, you can be sure that many people around the world will be watching it closely.
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