The Chinese economy has been improving this year, but unfortunately that trend reversed course in the latest batch of data. The chart below breaks down the three data points which were released Wednesday night NYC time. Retail sales were up 10.1% year over year. Obviously, that’s great growth by American standards. However, it missed expectations for 10.5% growth and was a sequential slowdown from 10.4% growth in July. The fixed asset investment growth was 7.8% year over year. That’s below the 8.2% growth expectation and the 8.3% increase in July. Finally, industrial production growth was 6.0% in August. That’s below the 6.6% expected growth and below the 6.4% growth in July. As you can see, these aren’t massive swings lower which signal an economic crash. However, the fact that all three missed expectations and fell sequentially, shows there’s weakness across the board. You can see the weakness started in June by looking at the red shaded area in the chart.
Let’s switch gears and look at the economic data from America which was released on Tuesday and Wednesday. One of my favorite surveys is the NFIB small business optimism report. It’s valuable to me because it is very detailed and because it’s one of the few data points we have on small businesses because they don’t report earnings like large public companies do. Small businesses are responsible for the majority of the hiring in America, so small doesn’t mean unimportant. The chart below shows that the headline NFIB index remained steady. It was up 0.1 point to 105.3. That’s impressive because it’s close to its all-time high.
The chart below is the components that make up the headline index. As you can see, 5 components were up, 5 components were down, and 1 was flat. That makes sense because the index was virtually unchanged. The third column shows the contribution to the index change. As you can see, none of the components had a 1% or greater impact on the index. That’s fairly unusual. I’m interested to see how next month changes because the hurricanes wiped away many small businesses along the coast. Even if a business has insurance, it doesn’t make sense to rebuild if the entire town is wiped away. Who will a business sell to if there’s no customers with disposable income? The survey might not be effected by this because these people effectively aren’t small business owners anymore if their storefront is gone.
The chart below reviews the small business outlook. It looks at the expected business conditions and the answer to the question if now is a good time to expand. The expansion outlook increased 4 points to 27. That makes the August reading the best reading since at least January 2012. That’s a great sign for the economy. It shows business was expect to be booming if the natural disasters never occurred. The best reason as to why it is a good time to expand according to the survey was economic conditions. The difference between good and not good was +6. Interestingly, the political climate wasn’t a big issue positively or negatively. While the country is contentious, the legislation promoted is either not going to happen or going to be good for business since taxes will be cut. The business conditions index was 37 which is flat from last month. Compared to the past few years, this is a great reading, but it’s decently off from the peak in December which was 50.
Now let’s look at small business’ earnings. As you can see from the chart below, small business earnings are near previous cycles’ peaks. This is similar to the metrics seen when calculating the forward 12 month earnings for the S&P 500 which is the small cap index. This profit growth is supported by the large acceleration in revenue growth. That growth is being offset by collapsing margins. Q3 is looking like the weakest year over year growth period for large, small, and mid-caps. Getting back to small businesses, the actual earnings change was -11. That’s a great result compared the past few years of data. Since January 2012, the best reading was -9. The breakdown from the question why earnings are down is different from the S&P 500. The biggest reason for declines is sales volume. The second biggest reason is increased costs. That means revenue growth is more challenging that margin expansion.
The JOLTS data was released recently. It shows a breakdown of the turnover in the labor market. I would consider it one of the most important reports I follow if it came out quicker. The most recently released report was from July. As you can see from the chart below, the job openings soared. Openings were 6.17 million which beat expectations for 6 million. Both the quits and the hires were flat. It would be better to see the hires above the openings. The fact that it isn’t implies a skills gap or tight slack in the labor market.
The final economic report we’ll look at is the sales of light weight vehicles across the world. As you can see, America stands out as the weakest area. American auto sales were down 1.9% in August and down 2.8% year to date. This will reverse in September as many new cars will need to be replaced after being destroyed in the two hurricanes in the last few weeks. Brazil/Argentina were the fastest growing year to date and in August; they were up 17.5% in August and up 12.1% year to date. That shows the political strife in Brazil isn’t slowing down the economy.
Conclusion
We went over the economic data which was released in the past few days. China is seeing moderate weakness after having a strong first half. American small businesses are firing on all cylinders. The auto market has been one sore spot in a decent economic year. That will change in the next few months as thousands of cars will need to be replaced.
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