US economy picks up pace slightly in third quarter

Yesterday, the US Department of Commerce reported that real GDP increased at an annual rate of 3.7 percent in the third quarter of 2004. In the second quarter, real GDP increased 3.3 percent.

The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, exports, government spending, and residential fixed investment.

What stood out was the increase of 4.6 percent in real personal consumption expenditures, compared with an increase of 1.6 percent in the second. This shows that the consumer remains an important -- and resilient -- driver of growth.

Real disposable personal income increased 1.4 percent in the third quarter, compared with an increase of 2.4 percent in the second quarter. As a result of spending going up more than income, the personal saving rate decreased from 1.2 percent in the second quarter to 0.4 percent in the third.

And this is the worrisome part. With the saving rate so low, there is little room for further strong increases in consumer spending. This does not bode well for the economy going forward.

Singapore's manufacturing down in September, but inflation accelerates

Singapore's manufacturing output grew 11.8 percent in September from a year earlier. However, on a month-on-month seasonally-adjusted basis, output shrank 1.2 percent. In August, manufacturing output had fallen 1.3 percent from July.

The Economic Development Board reported yesterday that output from the biomedical sector fell 12.3 percent in September from a year earlier due to maintenance shutdown in a pharmaceutical plant as well as the lower value of pharmaceutical products made.

Electronics output grew 20.4 percent last month. This was a slowdown from 29.2 percent and 30.7 percent growth in August and July respectively.

Overnight in the US, the Conference Board had reported that its consumer confidence index had fallen to 92.8 in October, the lowest level in seven months, from 96.7 last month. If consumer spending in the US weakens in the coming months, manufacturing in Singapore is likely to follow.

On Monday, Singapore's Department of Statistics had reported that the consumer price index (CPI) had risen 2 percent in September year-on-year. Compared to August, the CPI was up 0.4 percent.

With output declining and inflation rising, the economic recovery in Singapore looks increasingly in jeopardy.

Singapore property slow to recover

Singaporeans who have traditionally looked at property investing as a sure way of making money have been disappointed by its slow recovery. Excerpt of report from Channel NewsAsia:

Singapore property to see only gradual price rises as trends change: consultants
While some are rejoicing that the Singapore residential property market is finally turning around, others wonder why the rebound is so weak and why it has taken so long. After all, property markets around the region have been rising by double-digits over the last year. What makes it all the more surprising is that while Singapore's property market is the slowest to rise, its economic growth has been among the fastest in the region this year.

Sadly, property consultants say this is set to continue, as local property trends are changing.

Singaporeans need to wake up to the fact that property is no longer lucrative. You can't expect to make money just by investing like your father or grandfather.

A bubble in commodities?

Bloomberg columnist Matthew Lynn thinks that the commodity "bubble" has burst. He gives several reasons in an article titled "Is the Commodity Price Bubble Finally Bursting?" yesterday:

One, prices have risen too far, too quickly. Whether you call it a bubble or a bull run depends on whether you want to choose a "boo" or "hurrah" word. Either way, there is no doubting that prices have had a dream run. The experience of the past few years teaches us that if it looks like a bubble, walks like a bubble, and squeaks like a bubble, then it probably is a sudden attack of "irrational exuberance."

Two, the global economy is expanding slower. The International Monetary Fund last month predicted that gross domestic product growth would drop to 4.3 percent in 2005 from 5 percent this year. Slower growth will lead to slacker demand for commodities.

Three, supply will start to increase. The commodity-price surge has led to more investment. Look at some of the companies staging initial public offerings. In the past two months, in London, there have been listings of Mercator Gold Plc, a gold exploration company; European Minerals Corp., which is developing gold and copper deposits in Kazakhstan; and Frontier Mining Plc, which explores for gold. Those are just three examples...

There is, perhaps, a fourth reason, as well. Global interest rates have been at record lows. There is a lot of loose money swilling about. That has to come out as inflation somewhere -- and in many instances it has shown up in commodity prices. Yet the period of ultra-low rates seems to be coming to a close.

I'm reluctant to call the rise in commodity prices a bubble. The rise of China -- which has largely fueled the run-up in commodity prices -- will continue for many more years to come. The surge in commodity prices has been in anticipation of that.

While prices may have pulled back recently, I think the long-term commodity bulls are more likely to be on the right side of the trade.

US stock markets at a critical juncture

The Dow Jones Industrial Average hit a new low for the year of 9,757.81 on Friday as NYMEX light sweet crude oil rose above US$55 a barrel. Both the broader S&P 500 and the technology-laden Nasdaq, though, remain substantially above their year-lows, so we cannot conclusively say that the market has turned bearish.

But this looks like a critical juncture in the US stock markets. Many commentators have suggested that the markets are poised to rise after the uncertainty of the presidential election is over.

Although markets have been on a downtrend since peaking in the first quarter of the year, falls have not been large. A strong rise after the election could easily bring markets above their earlier peaks, and confirm a resumption of the rally.

However, a failure to break those earlier peaks would indicate that the market has made a major turn. In other words, we are in a bear market.

US slows, China grows

Latest indicators for the US and Chinese economies:

The US Leading Index Falls for a Fourth Consecutive Decline
The Conference Board announced today that the US leading index decreased 0.1 percent...in September, the fourth consecutive decline... However, these declines in the leading index have not been large enough nor have they persisted long enough to signal an end to the current economic expansion... While the leading index is not yet signaling a downturn, the growth rate of the leading index has slowed below its long-term trend growth rate, which is consistent with real GDP continuing to grow in the near term, but more slowly than its long-term trend rate.

The leading index now stands at 115.6.

No major surprise there. In fact, some economists had expected a bigger 0.2 percent fall in the leading index.

China's economy grows by 9.5 percent in first three quarters
China's economy grew by 9.5 percent in the first three quarters of 2004 compared to the same period last year, China's National Bureau of Statistics announced Friday. The NBS did not give a figure for the third quarter. The growth rate was slightly slower than first half growth, which amounted to 9.7 percent.

"In the first three quarters of this year, due to the further enhanced and improved macro-control measures, some unstable and unhealthy factors existing in economic life have been put under control," NBS spokesman Zheng Jingping told a briefing. "The weak links have been enhanced which have avoided big ups and downs in economic life."

Unlike the US, the Chinese authorities want a substantial economic slowdown to avoid overheating. As I point out in "US demand and Chinese production", manufacturing in China has been increasing to absorb the demand in the US. Over the past decade, China has raised its share of the global manufactured export market from 2.2 percent to 5.3 percent. As a result, signs of bottlenecks are already appearing, even in its supposedly-abundant labour market.

If the figures above are supposed to show a successful soft landing, as the NBS is implying, it's not very clear to me.

Singapore's manufacturers report poorer outlook

The outlook for Singapore's manufacturers appears to have turned poorer. Excerpt of the news report:

Rising oil prices dampen Singapore manufacturers' business outlook
Rising oil prices have taken a toll on Singapore manufacturers’ business sentiment, according to the latest survey by the Singapore Manufacturers’ Federation (SMa). The survey, carried out in September 2004, showed that Singapore manufacturing companies are less positive about business prospects in the next few months because of the threat of higher oil and raw material prices.

While most manufacturing firms here expect to stay profitable in the months ahead, more are now expecting business conditions to worsen.

According to the SMa, some 22% of survey respondents felt their businesses would deteriorate in the final months of the year, compared with 11% who felt so in the previous survey... And in anticipation of the leaner times ahead, fuelled by a slowdown in export orders, manufacturers are becoming more reluctant to hire more staff, the SMa said.

On Monday, International Enterprise Singapore had released a report showing that Singapore's non-oil domestic exports for September declined 1.4 percent compared to the previous month on a seasonally-adjusted basis. Year-on-year, though, it was up 16.9 percent, higher than most economists had expected.

What is of concern, though, was that non-oil retained imports of intermediate goods, a short term leading indicator of manufacturing activity, declined 7.2 percent on a month-on-month seasonally-adjusted basis. This is consistent with the SMa survey result indicating a weaker outlook for Singapore's manufacturing.

Benchmarking Temasek's performance

The publication by the Singapore government investment holding company Temasek of its financial report last week elicited a number of comments regarding its performance.

The Straits Times reported the performance with the headline: "Temasek reports impressive returns". The Financial Times wrote: "Temasek unveils poor returns". Which provides a better description of Temasek's performance?

Tan Boon Kean, editor of The Edge Singapore, explained the divergent views:

Temasek should have set a relative benchmark in its annual review. People have approached the report with different benchmarks and measurements, some of which can be unfair to Temasek chiefly because they are not apple-with-apple comparisons... Returns are best measured not just as absolute figures...but also relative to its peers.

Tan used the following benchmarks: the "Dogs of the Dow" (a compilation of returns from the 10 highest dividend-yielding stocks from the Dow Jones Industrial Average), the Fidelity Magellan fund, Berkshire Hathaway and the S&P 500. The 10-year performances lined up as follows:

Temasek	3%
Dogs of the Dow	12.9%
Fidelity Magellan	11.1%
Berkshire Hathaway	20.3%
S&P 500	13%

The above comparison puts Temasek in a bad light, and appears to justify the assessment given by The Financial Times.

However, Tan neglected to compare Temasek with what is obviously the most appropriate benchmark: the performance of the Singapore stock market. After all, most of Temasek's investments were in Singapore, in accordance with its charter at that time.

Over the 10-year period from 1994 to 2003, the Straits Times Index actually fell from 2,425.68 to 1,764.52. After adding dividends, I estimate that the market more or less broke even.

Seen in this light, Temasek's performance isn't too bad after all.

Mark Hulbert is bearish

Mark Hulbert, who tracks investment newsletters for CBS MarketWatch, is bearish. His reasons: Oil and complacency.

In "Do stocks and oil mix?", he writes:

To appreciate how unusual it is for the stock market to be strong in the face of rapidly rising oil prices, consider an academic study completed earlier this year by Ben Jacobsen, a professor of finance at Erasmus University Rotterdam, and two of his students, Gerben Driesprong and Benjamin Maat. (Read the study.)

To isolate oil's impact on stocks, these academics focused on the stock markets in 18 developed nations and in 30 emerging markets. Their study encompassed trading history as far back as 1973, when oil's price began to trade freely... It won't surprise you to learn that rising oil prices are bearish. But what may surprise you is that it takes an increase of at least 5 percent in a given calendar month to justify getting out of stocks in the next month. Why 5 percent?... Because, according to the researchers, stocks' long-run tendency is to go up. So it takes more than a mere modest oil price rise to counteract that long-run bullish tendency.

In "Complacency plagues newsletters", he writes:

[N]ewsletter editors have only begrudgingly reduced their equity exposure in the face of the market's decline. By no stretch of the imagination are they showing the signs of capitulation that typically are seen at market bottoms.

Based on Hulbert's sentiment index, newsletters are relatively optimistic now whereas two months ago, when the market was trading at more or less current levels, the average newsletter editor was net short the stock market. And in mid-May, when the market was also around current levels, the average newsletter was even more bearish.

Hulbert's conclusion: "Newsletter editors collectively have become complacent."

Asian stocks hurt by falling metal prices

Asian stocks fell today as the overnight fall in metal prices rekindled fears of a China-led economic slowdown even as NYMEX crude oil went back to US$54 a barrel. Copper prices in particular had dropped 10 percent in London and New York.

In Tokyo, the Nikkei 225 fell 161.70 or 1.4 percent to close at 11,034.29. Nippon Mining Holdings, Japan's largest copper smelter, plunged 7.5 percent to 541 yen while Sumitomo Metal Mining Co., a smelter of non-ferrous metals, fell 6.1 percent to 740 yen.

The Taiwan Weighted Index fell 2.2 percent to 5,831.07. The Korean, Hong Kong and Singapore markets all fell about one percent.

The fall in metal prices, however, have to be put in perspective. Copper prices had just hit 16-year highs on Monday. The pullback, while sharp, could be temporary, especially considering that oil prices remain high.

Temasek issues report

The Singapore government's investment arm, Temasek Holdings, has issued a report disclosing its investment holdings and performance.

Temasek's annual rate of return on investment, measured in terms of share price appreciation and dividends received, is 46 percent over the past year, 3 percent over the past 10 years and 18 percent over the past 30 years. That is pretty decent, especially for the 30-year period, which is understandable as it includes Singapore's high-growth years of the 1970s and early 1980s.

As at 31 March 2004, Temasek had $90 billion worth of investments, of which just over half were in Singapore. Other countries in which it is invested include Australia, India, Malaysia, Indonesia and the United States.

Slowing economic growth may support US dollar short-term

Morgan Stanley has cuts its global growth forecast as a result of rising oil prices. Excerpt of chief economist Stephen Roach’s commentary:

Danger Zone
As the odds of a full-blown oil shock rise, we have little choice other than to cut our global growth forecast... We are reducing our 3.9% estimate of world GDP growth for 2005 by 0.3 percentage point to 3.6%... This relatively modest cut to our annual growth numbers masks a worrisome shortfall we now anticipate in early 2005 -- a shortfall that pushes the global growth rate down to its “stall speed.” History tells us that is a very precarious place to be -- it doesn’t take much to tip a stalling global economy into outright recession. As I see it, that remains the major risk as we peer into 2005.

By region, our forecast cuts are pretty much across the board. For the major developed economies of the world -- the US, Europe, and Japan -- we are paring our previous GDP growth estimates for 2005 by -0.3 percentage point. That leaves us with a consensus forecast for the US (3.5%), slightly below consensus for Europe (1.8%), and well below consensus in Japan (1.0%). Our downwardly revised estimates are also below consensus in Asia ex Japan, where we have cut our pan-regional 2005 growth forecast by 0.3 percentage point to 5.5%. A reduction to our China forecast bears special mention, where we are cutting our 2005 growth prognosis from 7.5% to 7.0%; inasmuch as this follows an upwardly revised 9.5% estimate for 2004, our projected deceleration in Chinese economic growth is all the more dramatic...

Roach has been a pessimist on the sustainability of global economic growth for some time. But with NYMEX crude oil surging past US$54 a barrel today, his warnings are sounding increasingly ominous.

In my post yesterday and my article "Disappointing job growth may hurt US dollar", I had suggested that present trends imply that the US dollar should weaken.

The US trade deficit to be reported on 14 October will probably add pressure on the US dollar, with economists seeing no respite there. Earlier, Bloomberg quoted Richard Yetsenga, currency strategist in Sydney at Deutsche Bank, as saying: "It's hard to see the trade numbers be dollar supportive." It may fall beyond $1.2450 per euro, he said.

Indeed, yesterday on CNBC, well known investment manager Jim Rogers said he expected the US dollar to fall "for years to come".

And yet, if it is true that the US economy is slowing, the US dollar may actually benefit. This was pointed out by Marc Faber on CNBC today when he commented on last Friday's jobs report.

And I had in fact alluded to the same in "US dollar dragged down by trade deficit": "The US economy's strength, fuelled by consumption spending, is causing it to suck in too many imports and feeding its current account deficit, which is the basic cause of its weak currency." By the same argument, a weak economy may strengthen the US dollar.

It would not change the long term trend of the currency -- which must still be down -- but it does give currency traders a chance to make money from a countertrend bet.

Singapore's GDP shrinks in 3rd quarter

Singapore's blistering economic growth of the previous four quarters has come to an end. GDP declined by 2.3 percent in the third quarter on a quarter-on-quarter seasonally-adjusted annualised basis, according to a Ministry of Trade and Industry press release.

The third quarter of 2004 saw an expected moderation of growth in the Singapore economy. Advanced estimates revealed that real gross domestic product (GDP) in the third quarter rose by 7.7 per cent compared to the same period in 2003. On a quarter-on-quarter seasonally adjusted annualised basis, Singapore’s GDP declined by 2.3 per cent in the third quarter, reflecting a slowdown in the manufacturing and construction sectors.

Growth in the manufacturing sector cooled to 12.5 per cent in the third quarter after an exuberant second quarter. This is due largely to the decline in the biomedical manufacturing cluster arising from changes in production mix... [T]he construction sector continued to slip by an estimated 9.9 per cent in the third quarter... The services-producing industries are estimated to have expanded at a slower pace of 7.2 per cent year-on-year in the third quarter.

At the same time, the Monetary Authority of Singapore (MAS) issued a statement reiterating that it is maintaining its tightening bias.

Notwithstanding the slower growth, domestic price pressures are expected to persist, as the economy continues to expand and the labour market improves. In addition, there is an upside risk to external inflationary pressures from stronger commodity prices in particular, as well as the potential for a higher degree of pass-through of these cost increases in a strengthening domestic economy...

Going forward, the domestic economy will be entering a period of more moderate and sustainable pace of expansion. CPI inflation will remain largely contained for 2005 as a whole, although some upward pressures on consumer prices are expected. Against this backdrop, MAS will be maintaining its policy of a modest and gradual appreciation of the S$NEER.

So essentially, the MAS's decision to maintain its tightening bias reflects confidence that the economic expansion is sustainable and that the current soft patch is temporary.

Now where have we heard that before?

US employment situation is worse than it looks

US job growth disappointed again last Friday, with payrolls growing by just 96,000 in September, well short of the 150,000 or so expected by economists.

Barry Ritholtz at The Big Picture suggests that the actual employment situation is much worse than it looks. He thinks that there are structural problems in the labor market which might be overlooked. And in a post-bubble environment, "economists err when they apply the usual presumptions about typical recession/recovery cycles" as the environment does not conform to the usual rules.

He points out that a proper accounting of the labour participation rate would raise the unemployment rate -- officially at 5.4 percent -- to a higher figure. And if you add the marginally attached workers and part-timers who really want to be working full time, the rate rises to 9.4 percent.

So things are bad, and I can't say I'm surprised. The manufacturing sector in particular has taken a huge hit, no thanks to its vulnerability to the increasing intensity of global competition, which is in turn the result of the emergence of China as a manufacturing powerhouse and its increasing integration into the world economy. Now, India is adding to the intensity of that competition.

This increased level of global competition is, in my opinion, a major factor in holding back job growth in the US. And facilitated by advanced communication technology, the extent of the competition is unprecedented. With the rise in the global supply of labour rising much faster than the rise in global demand, something has to give.

What has given so far is US employment. But workers and job-hunters need not bear the burden alone. The US dollar can take some of the burden off them by depreciating to help the US economy absorb some of the competition, as I suggest in "Disappointing job growth may hurt US dollar". This would not only relieve the job situation but also the current account deficit.

Demand for oil may keep prices high

Oil prices are continuing to rise, with US light crude hitting US$53 a barrel yesterday.

At a briefing to economists and reporters in Singapore yesterday, David Robinson, deputy director of research for the International Monetary Fund (IMF), said that the recent surge in oil prices could shave 0.3 percentage point off the world economic growth rate of 4.3 percent it had estimated for next year in its latest World Economic Outlook report.

James Picerno at The Capital Spectator thinks that oil prices may not drop without a reduction in oil demand.

Demand Destruction—The Last, Best Hope?
A major downshift in demand may be the only silver bullet for slaying, or at least slowing, the bull market in crude. The commodity now changes hands for $52 a barrel, in case you haven't noticed.

What are the odds that demand is poised for an imminent sharp decline? Fairly low, writes Neil McMahon and his energy team at Sanford Bernstein & Co. in a research note dated yesterday. "A major drop in crude prices looks unlikely without a major drop in demand and currently we are seeing limited evidence of demand destruction."...

Likely or not, a material slowdown in demand growth, if not an outright fall in demand, looks increasingly necessary to offset the deficit in U.S. crude inventory levels. That's because demand is far easier to change in the short term, theoretically, than is supply. The smoking gun of evidence can be found in Saudi Arabia, where the oil reserves are second to none in quantity and accessibility. And yet, even the kingdom is having a tough time adding fresh capacity in the short term. No wonder the task is that much tougher virtually everywhere else.

A drop in demand, of course, is not likely to happen in the absence of a recession. So assuming that we don't get that any time soon, if James Picerno is right, be prepared to pay around US$50 a barrel for quite a while longer.

Caroline Baum on oil prices and US economic growth

I like reading Caroline Baum's column on Bloomberg for the insights that she provides. But I also find that her articles are sometimes prone to a bit of hyperbole.

In her latest article "Only 'Shock' Is 4 Percent U.S. Economic Growth", she wrote:

[M]any economists watched the incessant rise in oil prices from $30 a barrel a year ago to $50 today, even as producers pumped up supply, and assumed the effect would be the same as if the price increase were the result of a cutback in supply, which is what happened in the 1970s.

She makes a good point about the effect of an increase in oil prices resulting from rising demand being different from one resulting from a cutback in supply. However, I am not aware of any economist who has actually suggested that the recent rise in oil prices will have the same effect as those in the 1970s. The difference in the situation appears to be well understood, at least among mainstream economists. Rather, the main concern has been that economic growth already appears to be slowing and high oil prices makes it all the more difficult for the economy to overcome existing headwinds like slowing consumer demand and inadequate business spending,

Baum also quotes Jim Glassman, senior US economist at JP Morgan Chase & Co.:

"The pickup in consumer spending changed people's thinking on the economy," said Jim Glassman, senior U.S. economist at JP Morgan Chase & Co. Soft second-quarter spending encouraged the view that "the economy's natural tendency is to relapse," Glassman said. "It's not. The economy's natural tendency is to grow."

Glassman is an eternal optimist, and appears to think that everyone else is an eternal pessimist. Actually, most economists think that it is the economic growth rate that will relapse, not the economic output. In other words, they still expect growth, just that it will be slower.

Economic growth momentum still slowing

More indication that the world economic growth momentum is still slowing.

U.S. Services Sector Slips, Jobs Mixed
Growth in the vast U.S. services sector slowed in September, but mixed data on employment on Tuesday focused economists' attention on upcoming payrolls data to get a clearer sign about the outlook. The Institute for Supply Management's non-manufacturing index fell to 56.7 in September, its lowest level since May, 2003, and down from 58.2 in August. The number was below Wall Street predictions for an increase to 59.0...

The ISM survey's employment index rose to 54.6 in September from 52.5 in August. However, data from employment consulting firm Challenger, Gray & Christmas Inc. released on Tuesday painted a less optimistic portrait of U.S. employment. Employers announced 107,863 layoffs in September, an eight-month high and 41 percent higher than in the same year-earlier month. The other half of the Challenger report showed employer hiring announcements last month at only 16,166 new job openings compared with 132,105 job openings in August.

Things are little better in the United Kingdom.

Manufacturing shows sharp decline
The Office for National Statistics said that manufacturing output fell by 0.8 percent in August versus forecasts of a rise of 0.3 percent. That was the biggest decline since October 2002 and the first time manufacturing output has fallen for three months running in 2-1/2 years. That took the annual rise to just 0.4 percent from 0.7 percent in July.

With oil prices now at new records (US light crude has shot past US$51 a barrel -- see "Oil extends record run"), it's still far from clear that the world economy can regain much traction.

Singapore manufacturing outlook weakens but job market picks up

Like much of the rest of the world, Singapore's manufacturing sector appears to be losing momentum. The purchasing manager's index (PMI) for September slipped 1.8 points to 53.2. Although it was the 16th consecutive month above 50, it was the lowest in seven months. The sub-index for new orders fell 3.1 points to 54.6, while the production sub-index fell 4.2 points to 53.9.

The job market, however, is picking up. A survey by Hudson Global Resources shows that at least 43 percent of 500 companies polled in August indicated that they intend to recruit workers in the fourth quarter. Prospects look best in the IT and telecommunications sector, where 52 percent of the firms polled are predicting an increase in headcount, up from the 48 percent in the third quarter.

Of course, it should be kept in mind that the PMI is a leading economic indicator while the job market is a lagging indicator.

China's influence on the world economy

China is fast emerging as an important player in the world economy, as reflected in its recent appearance at the G7 meeting. The latest edition of The Economist has a feature on China. The excerpt reproduced below touches on an effect that China has that is, in my opinion, not recognised by many.

Economies can get truly richer only through increased productivity growth, either from technological advances or from more efficient production thanks to international trade. Thus China's integration into the world economy genuinely creates wealth. The same cannot be said of all the "wealth" produced by stockmarket or housing bubbles.

In recent years, many people around the world have found it easier to make money from rising asset prices than from working... But much of this new wealth is an illusion... rising house prices do not represent an increase in wealth for a country as a whole. They merely redistribute wealth to home-owners from non-home-owners who may hope to buy in the future. Nevertheless the illusion of new-found wealth has caused households as a whole to save less and spend and borrow more.

Historically low interest rates have fuelled housing bubbles in America and many other countries around the globe. At some stage prices will fall, obliging consumers to save much more and spend less. The unwinding of America's vast economic imbalances could depress growth there for many years, whereas China's slowdown looks likely to be fairly brief.

Oddly enough, China may be partly to blame for this wealth illusion in rich economies, because central bankers have been slow to grasp the consequences of China's rapid integration into the world economy. By producing goods more cheaply and so helping to hold down inflation and interest rates in rich economies, China may have indirectly encouraged excessive credit creation and asset-price bubbles there. Inflation has remained low, but excess liquidity now flows into the prices of houses and shares rather than the prices of goods and services. And to keep its exchange rate pegged to the dollar, China has been buying vast amounts of American Treasury bonds, which has helped to depress bond yields and mortgage rates, fuelling America's property boom.

The Economist appreciates the profound influence the Chinese economy already has on the rest of the world, particularly in fomenting asset bubbles. But the magazine is hardly alone. Morgan Stanley chief economist Stephen Roach, for example, has been talking about global imbalance -- global consumption being concentrated in the US, global production and investment being concentrated in China and the rest of Asia -- for a long time. And even as many other economists continue to debate over the reason for the decline in 10-year bond yields over the past few months despite rising federal funds rate, Roach, like The Economist, appears to be quite ready to point the finger at China (and Asian central banks in general, as I discuss in "Explaining the fall in bond yields").

Truly, it is becoming impossible to explain or forecast macroeconomic developments without taking China into account, as the G7 now well understands.

South Korean stocks surge despite weak industrial production

Today, the South Korean government reported that industrial production fell a seasonally adjusted 0.6 percent in August, the second fall in three months. Industrial production in August was up 10.6 percent from a year earlier. Factories operated at 78.7 percent of their capacity, the lowest rate in 12 months.

And how did Korean stocks react today? The Korea Composite Index rose a whopping 4.1 percent! It closed at 880.84, its highest level in half a year.

But all Asian stock markets were up today, boosted by strong Wall Street gains on Friday. The Nikkei 225 was up 2.7 percent to 11,279.63, the Taiwan Weighted Index rose 2.2 percent to 6,077.96, while the Philippine Stock Exchange Composite Index climbed 3.6 percent to a 4 1/2-year high of 1,851.60.

Business confidence in Japan improves

The Bank of Japan's quarterly "tankan" survey shows that the diffusion index (DI) for large manufacturers improved to plus 26 in September from plus 22 in June, better than the market's consensus forecast of plus 23. However, the DI for the outlook three months ahead came in at plus 21, suggesting that the recovery may slow.

The index for major nonmanufacturers improved to 11 from 9 in June.

The tankan DI is derived by subtracting the percentage of companies downbeat about their business conditions from that of those that are upbeat.