by Louis Navellier
May 17, 2022
I mentioned on Fox Business last Thursday that if the world does slip into a recession, the catalyst would likely be the China Covid-19 lockdowns that are creating the shipping bottlenecks that are currently rippling across the globe. The Wall Street Journal on Thursday (“China’s Economic Slowdown is Rippling All Around the World,” May 12, 2022) pointed out that many countries in Asia are now being adversely impacted by China, as well as German factories, Australian tourism, and American trade.
London’s Financial Times also reported (“China’s battered by lockdowns and global inflation,” May 9, 2022) that Chinese export growth has slowed to a 3.9% annual pace in April, the slowest pace in two years – a huge double-digit deceleration after growing at almost a 15% annual pace in March.
Clearly, the overall global economic slowdown, plus China’s Covid lockdowns, are taking a toll.
Apple and General Electric have warned their distributors about production and delivery problems due to China. Another example is falling vehicle sales in April in China for BMW, VW Group, and Tesla. Specifically, Tesla’s China sales in April plunged 98% to only 1,512 vehicles due to the Covid-19 lockdown at Tesla’s Shanghai plant. Since China has a massive consumer car market, that is close to “zero” sales, so if the world slips into a recession it could be due to waning Chinese consumer demand.
There is a newly released video of Chinese workers storming the barriers and fighting with security staff at an Apple contractor, Quanta, which makes MacBook Pros and other Apple devices. This reveals how unpopular the new Covid-19 sanctions are in Shanghai province. This video shows security guards, clad in protective white gowns, trying to catch workers that jumped over barriers. Not surprisingly, the Quanta factory is only operating at 30% capacity due to recent Covid-19 sanctions and lockdown orders. Clearly, it will take lifting these Covid-19 sanctions and lockdowns for Chinese exports to approach normal flows.
Navellier & Associates owns Apple Computer (AAPL), Dillard’s (DDS), NVidia (NVDA), Volkswagen Ag. (VWAGY) and Alphabet Inc. Class C (GOOG), in managed accounts. A few accounts own Tesla (TSLA) per client request only. We do not own Disney Corp (DIS) or General Electric (GE). Louis Navellier and his family own Apple Computer (AAPL), Dillard’s (DDS), NVidia (NVDA), Volkswagen Ag. (VWAGY), and Alphabet Inc. Class C (GOOG) via a Navellier managed account, and Apple Computer (AAPL), in a personal account. He does not Tesla (TSLA), General Electric (GE), or Disney Corp (DIS) personally.
Inflation is Still Rising Faster Than Expected
The Labor Department on Wednesday announced that the April Consumer Price Index (CPI) decelerated slightly to an 8.3% annual pace, down from 8.5% in March. However, the core CPI, excluding food and energy, rose 0.6% in March. In the past 12 months, the core CPI rose 6.2%. Used vehicle prices fell 0.4% in April, but they have still risen 22.7% in the past 12 months, so although the rate of consumer inflation has decelerated a bit in April, observers were expecting a bigger deceleration in consumer inflation.
On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose at an 11% annual pace in April, just slightly off its 11.5% annual rate in March. Wholesale energy prices surged 1.7% in April, while food prices rose 1.4%. In the past 12 months, the core PPI (excluding food, energy, and trade margins) rose 6.9% through April, similar to the 7.1% 12-month increase through March.
I should add that the U.S. Dollar Index (DXY) is up over 15% in the last year, with most of that increase coming in the last four months. This is helping to suppress inflation, since commodities are priced in U.S. dollars. Since the Federal Reserve is raising rates while Japan and the European Union (EU) have not yet raised their negative interest rates, this bolsters the U.S. dollar, as investors seek positive yields.
I also like to watch something called the “velocity of money,” which is how fast money changes hands. Essentially, when both businesses and consumers are out and about spending money, the velocity of money increases and prosperity rises. However, when businesses and consumers curtail their spending, the velocity of money decreases and economic growth slows. In that light, last week’s inflation news was critical, since any sign of slowing inflation will cause consumers to buy, boosting the velocity of money.
The Fed is desperately trying to raise rates enough to stifle inflation while avoiding a recession, which is called a “soft landing,” so I am amazed that Treasury Secretary Janet Yellen recently said that the Fed would have to be “skillful and also lucky” to engineer a soft economic landing. That is sort of a slap in the face of her former colleagues at the Fed. Treasury yields continue to rise as the Fed ends quantitative easing, but since the Fed funds rate is still far behind market rates, they have a lot of catching up to do, so a few more 50 basis point rate hikes by the Federal Open Market Committee (FOMC) remain likely. Since every rate hike hurts real estate sales and slows overall economic growth, this is a tough challenge.
Last year, the average homeowner made more (on paper) via home price appreciation than they did in wages or salary. Naturally, rising real estate prices tend to cause consumer confidence to rise, especially since many homeowners can tap into their home equity via credit lines or second mortgages. As long as mortgage credit is not cut off, property markets should help the Fed deliver a soft landing, and consumer confidence should remain relatively high, but this still requires delicate engineering by the Fed.
According to the New York Federal Reserve, credit card balances rose to $841 billion in the first quarter, as 229 million new credit card accounts were opened. Mortgages, auto loans, and student debt hit a record $15.84 trillion last quarter, so credit is still readily available, which bodes well for consumer spending.
Despite the initial report of negative GDP growth last quarter, the Atlanta Fed is estimating 1.8% annual second-quarter GDP growth, down from its previous estimate of 2.2%. That is in the low end of other estimates from private economists, who project second-quarter GDP growth ranging from 1.6% to 4%.
Finally, the Labor Department on Thursday announced that weekly unemployment claims increased slightly to 203,000 in the latest week compared to a revised 202,000 in the previous week. Continuing unemployment claims declined to 1.343 million vs. a revised 1.387 million in the previous week, reaching their lowest level in over 52 years (since January 3, 1970), which essentially means that it remains easy for virtually anyone to find a job. A strong job market bodes well for consumer spending and confidence.