Saturday, 5 March 2005

US economy doing fine but beware impact of China and outsourcing

The US economy continues to do fine.

Factory orders rose 0.2 percent in January on electrical equipment strength, according to the Commerce Department. Excluding transportation, factory orders rose 1.1 percent in January. December's factory orders were revised to a 0.5 percent rise from an originally reported 0.3 percent gain. January orders for durable goods, however were revised to a 1.3 percent fall from a 0.9 percent decline.

Meanwhile, the Labor Department reported that the US economy created 262,000 jobs in February, almost twice the January gain, which was revised to an increase of 132,000 jobs. As CNN noted: "It was only the second time job growth has reached the quarter-million mark in the last nine months, and the second time during that period that payroll growth did not trail economists' forecasts."

Consumer sentiment, though, fell in February. The University of Michigan's final reading of its consumer confidence index for the month was 94.1, down from January's final reading of 95.5.

Barry Ritholtz at The Big Picture has been betting each month that the jobs report would show a lower figure than consensus. Although that proved wrong this time, as the CNN report noted, it is generally the way to bet.

Strangely, though, in trying to determine why economists tend to get the figure wrong, he dismisses outsourcing as a reason, saying that it has "been pretty thoroughly reviewed by economists". Since my own view has been that US-based economists -- the ones who count since they are the ones who forecast US jobs -- have tended to underestimate the impact of offshore outsourcing, I would have to disagree with him.

For some of my recent commentaries that touch on outsourcing-related issues, see "The impact of China on the world economy" and "US demand and Chinese production".

Andy Xie of Morgan Stanley recently also touched on another area where China's impact may not be properly understood.

Investors compare China with various economies at similar stages of development and draw the conclusion that commodity and/or asset prices will go much higher. Property speculators compare Shanghai with London and view the gap in property prices between the two as the potential upside. Currency traders look at the productivity growth in China and believe that the renminbi will appreciate as the yen did 30 years ago. The global financial community is making the mistake of assuming that Chinese prices will rise to international levels as the economy develops. Instead, international prices are more likely to decline to Chinese levels through arbitrage by global companies, in my view.

The views here are not new. Xie has been talking about this for some time, and I had touched on it in my commentary "Fight against global deflation must involve Asia". Whether many people are listening is another story.

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