Hope and concerns in tale of two economies

A constant stream of economic news is spilling into the markets but some statistics matter more than others, and after a roller-coaster week for shares they are worth noting. What they suggest is that concerns about China's growth momentum are valid, and that concerns about America's growth are overblown.

A constant stream of economic news is spilling into the markets but some statistics matter more than others, and after a roller-coaster week for shares they are worth noting. What they suggest is that concerns about China's growth momentum are valid, and that concerns about America's growth are overblown.

First, China. The news at the start of the week was that gross domestic product expanded by 7.7 per cent in the three months to March, below a consensus prediction of 8 per cent and fourth-quarter growth of 7.9 per cent, but in line with growth for all of last year, and above China's third-quarter growth trough of 7.4 per cent.

It was still growth that would be astounding elsewhere in the world, but China's economy lost momentum as the quarter progressed. Exports, a telltale for global economic demand given the ubiquity of Chinese products, grew at at an annual rate of only 10 per cent in March, less than half the 23.6 per cent growth rate achieved in January and February.

Similarly, while power consumption growth in China is forecast to rise from 5.5 per cent last year to about 7.5 per cent this year, consumption rose at an annual rate of only 2 per cent in March, and at a 4.25 per cent pace in the March quarter. Demand was affected by a "whole society slowdown", according to the Electricity Council of China.

Goldman Sachs Asset Management head of Australian equities Dion Hershan has recently returned from a fact-finding tour that included China and the United States, and he says car sales in China also tell a story.

In 2009 vehicle sales in China rose by 48 per cent, and in 2010 they rose by 33 per cent. The surge drew strength from a wealth effect as China's boom pushed up discretionary incomes, but it was also supercharged by China's 4 trillion yuan global crisis fiscal support package.

As the yuan flowed, car purchases soared in 2009 and 2010. The stimulus pulled demand forward from the future, however, just as the Rudd stimulus packages did here, and after the money was spent, a consumption hangover arrived, just as it did in Australia. Sales of cars rose by only 2.5 per cent in China in 2011, and by 4.3 per cent in 2012. They were up 13 per cent on a year earlier in the March quarter, but that was helped by dealer discounting.

As Hershan notes, Australia's car market doesn't look shabby in comparison. Vehicle sales here in March were 6.7 per cent higher than they were a year earlier, according to the Australia Bureau of Statistics.

Hershan's question - a good one - is this: If China is slowing, and if the trends are weak in areas such as power consumption and car sales that reflect heavy industrial activity that consumes Australian mining commodities, is there good reason to believe that Australia's resources bear market is over?

The answer is probably no: the numbers China is throwing up suggest the pressure will stay on the mining component of the sharemarket, which led the S&P/ASX200 index to a 1.8 per cent loss in the five trading days to Thursday.

Now to the United States. It's been throwing off a mix of positive and negative news, and there's been enough of the negative stuff to rattle the markets. Ahead of Friday trading the S&P500 index of 500 US companies had fallen by 3.3 per cent in five trading days, and the technology-laden NASDAQ market had fallen by 4 per cent.

The heart of the matter is whether America's attempt to climb out of the global crisis is stalling, however, and at the heart of that question is America's housing market. There are two key measures to consider. Housing starts, and house prices. Both are improving.

The Case-Shiller Home Price Index is the best measure of US home prices, and it most recently showed that US home prices rose by 8.1 per cent in 20 big cities in the year to January. The index fell by 20 per cent in a year at the depth of the global crisis.

All 20 US cities in the index posted gains, and in 19 cities the rate of improvement accelerated. Gains were also strongest in cities that were hit hardest during the crisis. Prices in January were 13.4 per cent higher than a year ago in Atlanta, 13.8 per cent higher in Detroit, 15.3 per cent higher in Las Vegas, 12 higher is Los Angeles, 10.8 higher in Miami and a whopping 23.2 per cent higher in Phoenix.

The index also shows that over the long term many US home owners are sitting on solid capital gains. Los Angeles prices are 80 per cent higher than in 2000. Prices in Miami are up 53.5 per cent over the same period, Washington prices are 87 per cent higher and New York prices are up 62 per cent. Other cities are weaker. Detroit homes are 20 per cent below their 2000 level, Atlanta prices are still only 3.1 per cent higher and Las Vegas is still up only 4 per cent. Across Case-Shiller's 20-city sample however, prices are 50 per cent higher than 13 years ago.

New-home construction in the US is also now at its highest level in a half decade. Starts rose by 7.1 per cent to a 1.04 million annual rate in January, well above the consensus forecast of 930,000.

Starts are not back to pre-crisis levels, but of course nobody wants them to be. They ran at about 1.5 million a year in the '90s, and low interest rates and reckless lending practices fuelled by the junk bond boom pushed them above 2 million a year in 2003. They were back to a 1.5 million a year by the end of 2006 as the first signs of serious stress in the junk bond market appeared, and were struggling to stay above 1 million a year when 2008 started. They bottomed out during the crisis at a rate of just 478,000 starts a year.

Now starts are back above 1 million a year again. There is some way to go. The pre-crisis run rate of 1.5 million is a target, perhaps 1.7 million a year to allow for population growth. The housing sector is pulling up US activity now, however, and that will be so even as other economic indicators wax and wane.

GSAM's Hershan, like many others, is also impressed by the productivity gains US companies are delivering, and as the US recovery builds the rest of the world will benefit. China's export weakness, for example, will eventually be addressed if America grows its way out of trouble.

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