China’s Bubble Battle Begins

MONETARY

• At the Federal Reserve’s Annual Economic Conference at Jackson Hole, Fed Chairman Jerome Powell made comments on a number of recent and ongoing developments within the U.S. Economy¹
  • Powell recapped how the current inflationary environment initially began back in 2020-2021, and how that situation is now materially different¹
    • (Powell) “ The ongoing episode of high inflation initially emerged from a collision between very strong demand and pandemic-constrained supply”… “While these two forces are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”¹
  • Powell also noted that the persistent robustness of economic growth and consumer spending could potentially necessitate further policy action to achieve the Fed’s goal of sustainability lowering inflation¹
    • (Powell) “But we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”¹
  • Regarding the current state of the Labor Market, Powell offered some noteworthy updates of the Fed’s perspective¹
    • (Powell) “The rebalancing of the labor market has continued over the past year but remains incomplete. Labor supply has improved, driven by stronger participation among workers aged 25 to 54 and by an increase in immigration back toward pre-pandemic levels.”¹
    • (Powell) “This rebalancing has eased wage pressures. Wage growth across a range of measures continues to slow, albeit gradually. While nominal wage growth must ultimately slow to a rate that is consistent with 2 percent inflation, what matters for households is real wage growth. Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen.”¹
    • (Powell) “We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.”¹

FISCAL

• Biden Administration calls upon Congress to pass a short-term spending bill that would avert a possible government shutdown in the coming month²
  • At present time, the current government spending bill is set to expire on September 30 if no further measures are agreed to by then, which would prompt a government shutdown²
    • (Office of Management and Budget) ““Although the crucial work continues to reach a bipartisan, bicameral agreement on fiscal year 2024 appropriations bills, it is clear that a short-term continuing resolution (CR) will be needed next month,”²
  • Any new measures would need to pass both he Democrat-controlled Senate, as well as the Republican-controlled House of Representatives, which could complicate negotiations²

GEOPOLITICS

• The Chinese Economy is currently feeling the widespread effects of a property market bubble collapse, which has permeated throughout the economy and negatively impacted everything from banking, to supply chains, and even economy-wide employment³
  • Two of the country’s largest property developers have experienced tremendous financial hardship over the past year as an oversaturation of supply has caused firms to experience severe losses³
  • Downstream effects of property bubble collapse have been particularly felt by younger workers, as China’s youth unemployment rate is now seen as likely close to 40-50%³
    • Since reaching such highs, China is now no longer officially reporting on that metric³
  • It is also being reported that suppliers to Chinese property developers have not been being paid for some time, with estimates coming in at overdue amounts of roughly $390B owed to suppliers in the aggregate³
    • A vast array of suppliers and service providers from real estate agents, landscapers, construction workers, mortgage owners, and more have reported not being paid in full, or at all, by various property developers³
    • The inability of property developers to pay has negatively impacted large swaths of the economy, further increasing an already difficult macro environment³

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Federal Reserve. “Inflation: Progress and the Path Ahead”. August 25, 2023
2. US News. “White House Seeks Short-Term Funding to Avoid Government Shutdown -Report”. August 31, 2023
3. New York Times. “Paid Late, or Never: Painters, Builders and Brokers Hit by China’s Property Crisis”. August 28, 2023