The "Miracle" Of China's PMI Resurrection In 1 Uncomfortable Chart

Tyler Durden's picture




 

All around Asia, PMIs are tumbling... except for China's government-sponsored Manufacturing PMI. This week saw Aussie Services PMI (linked significantly to China) tumbled to 2014 lows, Japan's PMI drop, and China's own Services PMI disappoint and fade to 2-month lows. So where is all this exuberance coming from in China's manufacturing industry (despite a 8-month in a row drop in employment)? We don't know; but the fact that China coal prices just hit a record low hardly supports the smog-choking industry of China being at 7-month highs... Hard data vs soft surveys? You decide.

One of these things is not like the other...

CHINA PRESS:

Domestic coal prices fell to another record low following recent price cuts by major coal producers. The Bohai-rim Steam-Coal Price Index, a benchmark used by the coal industry, fell 1.7% on-week, to CNY519 per ton on Tuesday, its lowest level since the index series started in 2010.

 

Major coal producers, including Shenhua and China Coal, slashed prices over the weekend with the price cuts coming earlier than market expectations, which are expected to boost domestic coal market share and hurt China's coal imports. (China Securities Journal)

*  *  *
Of course, not every manufacuring plant needs coal and there are other factors of supply and demand involved but it seems odd that the previously strong correlation between the two would collapse as the Chinese 'need' to show a better economy to hide the reality of collapsing real estate markets, a faltering shadow banking system, and lost trust in lending.

*  *  *

We leave it to BofA to destroy another hope-strewn mth with some facts...

Destroying the 'myth' of the exuberant PMI data...

Via BofAML,

While a bit more than half of the recent data have been weaker than expected, the manufacturing and nonmanufacturing purchasing manager’s indexes have been very strong, jumping 4.8 and 5.8 points, respectively, since June. By some accounts, these data are better indicators than the hard numbers that come out of the government. After all, they are released very early, they are raw unfiltered data (other than seasonal adjustment), they are never revised and they are simple to interpret. We disagree. In our view, they are useful as a rough and ready early read on the economy. However, once the corresponding official data are released, we put very little weight on these surveys.

It is important to understand how crude these surveys are. Each month, a few hundred purchasing managers are asked if a variety of activity variables are up, down, or the same relative to the prior month. Their responses are then converted into diffusion indexes: the sum of the number managers reporting activity is “increasing” and half of those reporting “the same.” Note that there is some guesswork involved: the survey is taken before the month is over and some of the questions cover areas of the firm that are difficult for a purchasing manager to get a timely read on. For example, a purchasing manager may not have a very precise idea of what is happening to hiring in a large, diverse firm. Moreover, since they don’t gather specific numbers for each series, they may have to make a rough guess, particularly if the trend is slightly up or down.

Fans of the two indexes point out that they are relatively stable, easy to interpret and never revised. However, in our view, the simplicity of the data is a drawback, not an advantage. It means no attempt is made to correct misreporting or to include late respondents. Moreover, the sample they use is not representative of the overall economy. They represent a broad cross-section of industries, but they oversample big firms and they make no attempt to adjust for the birth and death of firms. The US is a dynamic economy and these surveys will miss these compositional shifts. Indeed, a lot of the revisions to official data come from attempts to fix all these problems rather than ignore them.

A comparison with payroll employment underscores these drawbacks. The preliminary payroll report is based on data from 145,000 establishments with 557,000 individual worksites. Thus if the BLS wanted to, it could turn its raw data into simple up or down answers and then create hundreds of diffusion indexes just like the employment component of the ISM index. However, that would mean throwing out information on both the size of employment changes at each company and turning a big sample into a bunch of tiny samples.

One way to show the information advantage of the employment report is to show how it correlates with manufacturing output. Using data from 1990 to present, the employment component of the manufacturing ISM index has a correlation of 0.39 with monthly industrial production growth. How does the official data compare? First, using the Labor Department’s own diffusion index—based on 84 industries—the correlation improves to 0.46. Second, using the actual job growth data, the correlation improves to 0.60. And, finally, if we also take into account the length of the work week, the correlation for aggregate hours worked and industrial production is 0.69. Clearly, more information is better.

 

How do we interpret the latest ISM numbers? Table 2 above shows the results when we regress GDP growth on its own lags and then add the composite ISM. The results underscore the difficulty in forecasting GDP. Using the average ISMs for July and August, the model with just GDP lags predicts growth of 2% in 3Q, while the model with the ISM points to 4.0%. However, the error band for these forecasts is very high - the “standard error” for the first model is 2.4pp and the second model 2.1pp. In other words, using a two standard error confidence band, we can be “95% confident” that growth is somewhere between zero and 8%. On the other hand, it is encouraging that the ISM is statistically significant.

To recapitulate:

the US data mills churn out a lot of surveys. Since the last FOMC meeting, there have been four new ISM readings and a bunch of regional releases. A popular view is that these surveys are better than hard data. In our view, however, these data get way too much air time. They give a timely, rough read on the economy, but should get little weight once hard data are released.

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Fri, 07/04/2014 - 16:18 | 4925308 knukles
knukles's picture

Seasonrolls

Fri, 07/04/2014 - 16:22 | 4925313 International Jew
International Jew's picture

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:24 | 4925323 International Jew
International Jew's picture

 

MAD

 

zerohedge muppet thinks to itself goyim wog self:

 

Thank god that truth teller is gone.  Don't know what I would have done if I had to hear anymore painful truth about what a shitty moron i am.  :D

Love you!

Fri, 07/04/2014 - 16:47 | 4925369 ZerOhead
ZerOhead's picture

< Definitely a terrorist

< Might not be a terrorist but we really don't care...

Dear Department of Homeland Security... just in case you need to practice up on your enhanced interrogation techniques...

http://www.dhs.gov/if-you-see-something-say-something

Fri, 07/04/2014 - 16:31 | 4925346 DeadFred
DeadFred's picture

LOL looks like Tyler needs another can of TrollBGone. Not you knukles, how's your 4th going?

Fri, 07/04/2014 - 18:11 | 4925587 knukles
knukles's picture

Thank you!  Sweet, Fred!
Shot 4 over on the back 9 this morning and we're just getting ready to throw some burgers on the grill, candy sweet corn on the cob .....
Hope yours is as nice.
Be well, my friend

Fri, 07/04/2014 - 16:47 | 4925384 TheReplacement
TheReplacement's picture

It is not winter.  Perhaps the Chinese don't heat their homes in the summer.  Those idiots.

This is one bad post.  At least try to show a correlation or disconnect between a heating fuel and the season. 

'Hey it's summer and Americans are driving more.  Why is gas going up?'

Fri, 07/04/2014 - 21:30 | 4925886 americhinaman
americhinaman's picture

TheReplacement, you are correct.  Also, coal is on the shit list for causing pollution, until coal scrubbers get installed that is.  For now it's natgas (they are using more, even willing to run down reserves now that they have huge supply imminent from Russia) and nuclear.

ZH, before writing posts like this, please go visit say, the BOTTOM 20 gdp cities in china with over 3mm residents (yeah that's right, the bottom 20 not the middle or top... where my points would be emphasized or overemphasized).  tell us if it looks like these cities are about to go bust.  if you don't have time to go do so, i'll give you a preview.  china is booming, firing on all cylinders but one (housing price and luxury home building).  manufacturing and services macro figures look good because they ARE good.  true unemployment is low, and wages are up ~10%/yr since the 2008 crisis.  that's leading to moderate "demand pull" consumer inflation, which is still low enough that real incomes are up > 5%/yr over the time frame.  all in the context of an EXPANDING labor force, both in total numbers and in % of population.  pretty much all polar opposites from what's going on in the USA really.

and what about the one macro area that is the last bastion for china bears (housing)?  prices are indeed falling in a handful of cities, but just barely.  most Chinese know that it's GOOD for the macroeconomy if housing prices fall so that the rank and file can afford to buy.  if the dreams of 90% of chinese peasant class come true (housing prices crash and they all get to scoop up a home on the cheap), there's almost no leverage in the system to cause any real macroeconomic damage.  the leveraged developers are miniscule compared to the flood of demand that is waiting to buy "if prices just fall a few percent more".

Fri, 07/04/2014 - 16:21 | 4925312 International Jew
International Jew's picture

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE!

Fri, 07/04/2014 - 16:52 | 4925325 International Jew
International Jew's picture

captain COMMENSE SPAM POST CUS THIS WEBSITE IS A TOTAL FUCKING JOKE FILLED WITH WOGIM!

THAT MEANS GOYIM WOGS! I just made it up,

Fri, 07/04/2014 - 16:31 | 4925345 debtor of last ...
debtor of last resort's picture

We can go back further, but i don't want to talk about rice.

Fri, 07/04/2014 - 16:37 | 4925356 Davos
Davos's picture

Cheese pipe

Fri, 07/04/2014 - 18:21 | 4925607 nightshiftsucks
nightshiftsucks's picture

It's at the low since the chart began in 2010,what don'you understand ?

Fri, 07/04/2014 - 16:22 | 4925315 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:22 | 4925316 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:23 | 4925317 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:23 | 4925318 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:23 | 4925319 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:23 | 4925320 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:49 | 4925389 TheReplacement
TheReplacement's picture

Dear comrade Obama,

It appears that your trollbots are forever getting stuck in repost loop hell.  Please find another vendor to design your propaganda-troll software before continuing.  You are making us all look stupid in addition to evil.

Sincerely,

The Iron Bank

Sat, 07/05/2014 - 10:51 | 4926422 razorthin
razorthin's picture

May a heat-seeking Palestinian missle find its way to your rectum.

Fri, 07/04/2014 - 16:23 | 4925321 International Jew
International Jew's picture

who needs to troll when the truth is soooooooo MUCH MORE FUCKING FUN!

u mad kid?

O WOW ANOTHER CHART THAT LOOKS BACK LESS THAN A YEAR HOLY SHIT THANKS ZEROHEDGE! 

I FEEL ANOTHER SMART THOUGHT COMING ON, JEEZ I JUST LOVE ZEROHEDGE, IM SO MUCH SMARTER THAN ALL THOSE DUMB MUPPETS!

Fri, 07/04/2014 - 16:36 | 4925354 Davos
Davos's picture

Cheese pipe

Fri, 07/04/2014 - 16:45 | 4925381 FlyingDutchman
FlyingDutchman's picture

CAPS LOCK STUCK

Fri, 07/04/2014 - 16:32 | 4925347 zorba THE GREEK
zorba THE GREEK's picture

THIS GUY MAKES ME MISS MILLION DOLLAR BONUS.

Fri, 07/04/2014 - 16:51 | 4925394 orangegeek
orangegeek's picture

yep - China and Russia contractually locked up to do business - that should turn out well

 

how do you know when a communist is lying?  their lips move.

Fri, 07/04/2014 - 16:59 | 4925421 starman
starman's picture

Maybe I had one to many but that chart with six or pluss graphs looks very fucking patriotic! Wait the stars are coming on now.........

Fri, 07/04/2014 - 19:56 | 4925764 Aussiekiwi
Aussiekiwi's picture

Chinese data is not worth the 0's and 1s' it took to create it, there is a reason why the Chinese are desperately buying anything in real estate they can get their hands on in Landon, Canada, Sydney,Auckland etc.

Fri, 07/04/2014 - 21:56 | 4925914 Wild Theories
Wild Theories's picture

I've said it before in another post and I'll say it again.

Chinese manufacturing is CYCLICAL and follows SEASONAL TRENDS.

It always rises from mid-year and goes into high gear in the 2nd half of the year, and drops after new year and stay low in the 1st half of the year.

 

Pull out the chart on China manufacturing PMI for the past 10 years and you'll see the trend clear as fucking crystal. This is just doomsday wankery.

Sat, 07/05/2014 - 07:12 | 4926215 AdvancingTime
AdvancingTime's picture

Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

Sat, 07/05/2014 - 08:20 | 4926258 fattail
fattail's picture

SSSHHHHHH.....  I thought only Cramer and the imbeciles watching CNBC gave two shits about PMI surveys.  Anyone going to make money is going to be watching prices of real goods, services, and resources to know the direction of the economy.  US gasoline usage is down over 10% from the peak, domestic production is up, but the price is higher?  Miles driven... No still way below 2007 levels.  

http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

But please tell me again what a bunch of executives may or may not know about their own firm.  If they are like most organizations those surveys are filled out by the secretary or an intern.

Coal price declining in china, obviously all of their solar and wind energy facilities are coming on line and displacing that dirty technology.  OR.....  Perhaps they shut the electricity off to all of the ghost cities/empty highrise condos/empty office buildings?

 

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