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China’s ‘Reopening’ Is Missing Consumers. That’s a Bad Sign for U.S. - Barron's
The early numbers from Chinas recovery are in, and they dont bode well for the U.S. economy as it grapples with the fallout from the coronavirus crisis. Before digging in to the latest numbers released at the end of last week, its worth remembering the timeline: In December and much of January, officials in Wuhan, China, tried to hide the existence of a new respiratory virus because they wanted to keep the economy humming. The ensuing strain on the health system and consequent death toll pushed the central government to impose an intense lockdown on all of Hubei province at the end of January that was eventually extended to the rest of the country by the beginning of February.By the beginning of March, however, the Chinese government had lifted restrictions on most of the country. Most of Hubei was let out of lockdown before the end of the month. In other words, the January and February numbers should give a sense of what a shutdown does, while the March data ought to tell us what a reopening might look like. The big headline was that Chinas gross domestic product was 9.8% lower in the first three months of the year than it was at the end of 2019. That is equivalent to a 34% drop at an annual rate, which is how U.S. GDP data are normally reported. Chinas first-quarter drop is therefore close to many private-sector forecasts for the U.S. in the second quarter. A closer look, however, suggests the U.S. experience will probably be worse. Aside from the fact that China ostensibly got its outbreak under control much faster, the composition of the Chinese economy is markedly different from the U.S. economy. About 40% of Chinese economic activity takes the form of manufacturing, mining, utilities (collectively referred to as industry) and construction. Workers in these sectors are used to wearing specialized protective gear and their jobs rarely require close personal contact. Getting factories and construction sites back online isnt much of a challenge. Moreover, much of the demand for their product either comes from the Chinese government or from abroad. Until the rest of the world began to shut down in response to the threat of the virus a few weeks ago, these factors meant it was possible for output in a large chunk of the Chinese economy to snap back quickly. Real-estate investment, which is often dictated by state mandates, rebounded so much in March over February that growth is now positive year-on-year. In February, private industrial enterprises were producing 20% less than they were at the beginning of 2019an unprecedented decline. But by March, output was only 0.5% lower than it was a year earlier. Thats still far below the previous growth rate, which had been around 8% per year, but is still a dramatic improvement. The notable exception is Chinese motor-vehicle production, which is aimed at domestic consumers rather than export markets or government contracts. While monthly output is subject to seasonal variation and Chinese appetite for new cars and sport-utility vehicles had been dropping since the beginning of 2018, the decline in the beginning of this year is still obvious. So too is the absence of a meaningful recovery. In the U.S., industry and construction account for only 18% of economic output. So even if production and building rebound as quickly as in Chinawhich would be a challenge given the lack of export markets and government-sponsored demandthe boost to the overall economy would be far smaller. At the same time, household consumption plays an unusually small role in the Chinese economy. Only 39% of national income is spent by households on goods and services, with almost half of that spending going to food and shelter. That reflects deep problems with Chinas society and government, but in the short term, it shields many of Chinas workers and businesses from disruptions in the consumer economy caused by a viral contagion. By contrast, American households consume about 68% of U.S. GDP, with much of that spending going to services severely affected by the coronavirus. So its worrying that the Chinese consumer has failed to bounce back even after the economy has reopened. In the first two months of 2020 (Chinese statisticians count them together because of differences in the timing of the Lunar New Year holiday), Chinese consumer spending excluding groceries and gasoline was 22% lower than in the first two months of 2019. Since then, core retail spending has grown only 0.7%, such that retail spending in March was still 18% lower than a year ago. The biggest drop has been at restaurants, where spending is still down about 46% from where it was a year ago. Spending on meals was lower in March than in February despite the economys reopening. (Grocery spending is up 15% over last March.) Spending on goods excluding foodstuff and petroleum products is also down about 14% compared to March 2019, up just 2% since February. Put it all together and the Chinese experience suggests the U.S. economy would still be operating well below capacity even if there were no government-mandated lockdowns. Write to Matthew C. Klein at [email protected]