The Week in Review: Spending Falls, Investment Rises in China and U.S.

Weak fundamental data and rising savings and investment rates in the U.S. and China indicate recent trends towards economic improvement might be reversing.

American consumers are spending less and saving more.  Some interpret this as an indicator that aggregate demand is depressed and economic growth is set to slow. Others have noted an economic contraction in the first quarter may be a possibility due in part to exceptionally cold weather.  This is despite an easy comparison, noting that economic growth was sharply negative for the same period a year ago.

Weak fundamental data and rising savings and investment rates in the U.S. and China indicate recent trends towards economic improvement might be reversing.

American consumers are spending less and saving more.  Some interpret this as an indicator that aggregate demand is depressed and economic growth is set to slow. Others have noted an economic contraction in the first quarter may be a possibility due in part to exceptionally cold weather.  This is despite an easy comparison, noting that economic growth was sharply negative for the same period a year ago.

A recent survey of over 1,000 Americans show most Americans were planning to save and invest money they are receiving from tax returns and lower gasoline costs. Some economic models developed after oil’s steep fall in late 2014 projected a sharp rise in consumer spending, particularly on discretionary goods and services. Consumer discretionary stocks rallied in late 2014 on the fall in oil, but some have since corrected as more indicators suggest Americans are hoarding savings.

In a separate report, the Commerce Department noted at the end of March that spending is growing much more slowly than incomes, which rose 0.4% in March as the labor market continues to tighten. Some analysts saw the trend as indicative of growing insecurity in the workforce. With the mass layoffs of 2008 and 2009 still fresh in the memory of many Americans, they are choosing instead to save more of their income in case they lose their jobs and cannot find another one, instead of spending more aggressively as was the trend in the late 1990s and in the middle of the last decade.

With lower spending on goods and services, the Institute of Supply Management saw the U.S. non-manufacturing index fall to 56.5 in March, indicating lower expansion than in previous months. Business activity growth fell to the lowest rate since the third quarter of 2014, despite gains in employment seen by both the ISM and the Commerce Department.

China Stock Rally

Hong Kong markets saw two strong days of rallying equites prices, as a flood of capital from the mainland to Hong Kong drove stock prices higher. Analysts noted that capital flows to Hong Kong reached 100% of southbound quotas for capital flows. In China, regulators have set quotas for how much capital can go to Hong Kong from the mainland, and on Wednesday, that quota was full for the first time.

Many interpret the trend as indicative of unsophisticated retail investors in China fleeing the local housing market, as Shanghai recently posted an 8% fall in real estate prices. Additionally, some analysts worry the trend towards equities is a negative indicator for Chinese growth, as it suggests investment in small businesses is lagging and consumers are hoarding savings in high-risk investments that they do not fully understand.

Macroeconomic indicators suggest weak demand and productivity in China. A recent PMI report showed productivity remained relatively flat in March after falling in January and February.