The devil is in the detail. More to economic data releases than the headline...
17 February, 2015
Last week China reported a record trade surplus?
They did indeed but it's more than just the surplus, it's this raft of economic data that's been released since the beginning of the year and what I've found interesting is that year to date the market seems to be paying a lot more attention to these economic data releases and interpreting them in sometimes odd and confusing ways. The China trade surplus is the first of it.
China announced a record trade surplus of $US60 billion for one month — its best trade surplus ever. This is like a record profit in that China exported $US60 billion more than it imported. However, if you looked at the headlines accompanying the news, you'd be hard pressed to find one that spoke positively about this surplus in positive terms. An example was a Reuters headline which said "China's imports slump capping dismal January trade performance". Reuters went on to say that China's imports had slumped 19% in January compared to last January, and they made it seem a terrible thing. But actually, imports had slumped largely because the price of the imports had fallen due to a strong currency, the yuan, and also due to the fact that China has benefited enormously from the halving of the oil price. China's imports fell because they didn't have to pay as much for the goods that they bought offshore. Also, they imported less because China is producing more itself so it is less reliant on the rest of the world for its goods — that's not necessarily a bad thing either.
What makes the interpretation of this data even more confusing is that at around the same time, the US announced a record trade deficit. This was the biggest monthly increase in America's deficit, which means they paid more to foreign countries than they received from the goods they exported. If the US was a company, this would be regarded negatively, but instead the headlines trumpeted this as an achievement because it was a sign of the strength of the American consumer. They are spending up large, which is a good thing, because that will drive up economic growth in the American economy.
We had the US nonfarm payroll employment report and that was mixed messages there as well was it?
It was heralded as an amazing jobs report, with Bloomberg releasing the headline "December employment gain caps the best year for the US since 1999". USA Today said the employment report confirmed that the US remains a bright spot in an otherwise languishing world economy. There is definitely an element of trying to convince themselves here — with strong growth and a surplus in China, you can hardly say that China's economy is languishing.
The jobs report did show that more people got jobs, which continued a trend that has been developing for 18 months now. However, looking at the detail of the report, a lot of the jobs were in relatively low paying areas such as food service and drinking places (i.e. restaurants and bars) and while the number of jobs had increased the average hourly earnings had fallen the most in eight years.
Bloomberg also found one line in the jobs report that interested them and they published an article saying we could run out of college graduates to fill jobs. In the jobs report they noticed that the unemployment rate for college grads was 2.8% which is less than the unemployment rate across the country of 5.7%. So their story took the rose-tinted view that basically the American labour force is up-skilling and that it is a great news story for the American economy. The devil in the detail was that the rate was low because a lot of college graduates were not looking for a job so they hadn't registered as unemployed. Also, a large percentage of them had taken those jobs in bars and restaurants so they don't appear as unemployed making that number look better, and they had taken new jobs (albeit low-paying and part-time) which made the employment number look better.
If you just look at the headlines, you miss the story.
One final example has been in the reporting of European economic growth. Now everyone knows that Europe has been the problem child for some years now and a lot the media like to point the finger at Europe to make other countries (especially the US) look good. The Eurozone released their GDP last week showing it grew 1.4% annualized in the 4th quarter of last year. This was its seventh straight quarter of growth and it beat expectations. But reading the headlines, you'd never have known it. We had headlines like "growth masks a broken eurozone" or "Germany is leaving France behind creating a worrying two-speed tension at the heart of Europe" or a "lopsided recovery will create political tensions". These headlines really do emphasise the half-empty media interpretation of the economic data. Of course some of the European countries are growing slower than others, but does that really matter to the world at large? Should the world really be concerned if 3 of the 15 countries included in the data, representing 4% of the Eurozone, had negative growth? I suspect that the world doesn't need to lose sleep because Greece, Cyprus and Finland shrink a little.
One commentator described the phenomenon as like being in a twilight zone where what we see is not actually what is happening.
This year we're going to have to pay a lot more attention to economic data because don't have the Federal Reserve to give us a steer given that they've stopped their quantitative easing programme, so instead markets read data coming out of economies but we should remain cynical and recognize that the devil lies in the detail.