Uncovering the hidden truths behind US economic data

The U.S. economy showed impressive performance in the first three quarters of 2023, despite continuous interest rate hikes by the Federal Reserve. This performance included record-breaking stock market valuations, a sustained decrease in unemployment rates, and rapid GDP growth.

The Biden administration aims to be recognized for creating one of the great “economic miracles” of U.S. history. However, a closer examination reveals certain issues.

Manufacturing, once a vital pillar for the U.S.' rise as a global economic powerhouse, has been gradually marginalized with the rise of financial capital.

According to data from the Federal Reserve Economic Data, investment in U.S. manufacturing rose from $133.2 billion at the end of 2022 to $194.3 billion in May 2023, marking an 80 percent increase in investment in manufacturing facilities.

Despite a 2.3 percent year-on-year increase in U.S. GDP in the first half of 2023, national electricity consumption decreased by 3 percent during the same period. While it's possible that an increase in industrial electricity consumption was offset by decreases in the residential and commercial sectors, in reality, electricity consumption declined across all three sectors.

The U.S. Energy Information Administration's (EIA) Short-Term Energy Outlook, released in September 2023, forecasted a 1.26-percent decline in total U.S. electricity consumption for the entirety of 2023. This reduction is expected in the residential, commercial, and industrial sectors.

Despite efforts by the Biden administration to revitalize manufacturing, the sector has seen little change in job numbers since January 2023, with only a modest increase of about 200,000 jobs compared to early 2020.

Furthermore, the U.S. Institute for Supply Management's (ISM) manufacturing index has remained below the 50-point threshold since December 2022, signaling ongoing contraction for 11 consecutive months.

These facts raise questions about whether the U.S. manufacturing sector is truly experiencing a sustained period of growth.

Data from Texas, a major manufacturing hub, also points to challenges.

Factory activity in Texas contracted again, as indicated by surveys released at the end of August 2023. The production index fell to -11.2, the lowest since May 2020. Other key indicators also showed declines: the new orders index remained negative at -15.8 in August 2023, the capacity utilization index dropped to -3.7, the shipments index decreased to -15.8, and the capital expenditure index hit a three-year low at -8.6.

Cathie Wood, a renowned U.S. investor and CEO of ARK Invest, has expressed concerns about the courier market. Analyzing UPS revenue data, she found that although the market share of major courier companies has remained relatively stable, UPS's average daily package volume has decreased, suggesting a contraction in the overall courier market.

Additionally, FedEx has projected a 25 percent year-on-year decrease in its total logistics volume in the U.S. for 2023.

Despite significant layoffs in the U.S. technology industry since early 2023, employment data has shown a surprising positive trend. The unemployment rate has consistently decreased, reaching its lowest level in more than 50 years.

In October 2023, two sets of employment data were released in the U.S., revealing noticeable discrepancies. The U.S. Bureau of Labor Statistics reported a substantial increase of 336,000 jobs in the non-farm sector in September, far surpassing market expectations of 170,000 jobs.

However, data from Automatic Data Processing (ADP) indicated a much lower increase of only 89,000 jobs. This significant difference between the two data sets is highly unusual.

Mark Zandi, chief economist at Moody's Analytics, suggested that actual monthly job growth may be between 150,000 and 200,000, significantly lower than the official figure.

Some discrepancies between economic data and the actual situation can be attributed to statistical margins of error, while others cannot.

The first explanation implies that statistical methods may have a margin of error.

According to 2022 data from the Brookings Institution, approximately 2 million to 4 million workers in the U.S. were unable to continue working due to the long-term effects of COVID-19.

Since 2023, the U.S. government has repeatedly revised downward its initially announced employment data. These data releases are typically positive, followed by interest rate hikes by the Fed, and then subsequent downward revisions by the government.

If this pattern occurs occasionally, it might be chalked up to statistical error. However, if it becomes a recurring event, it may point to serious issues with the statistical methods or even deliberate manipulation aimed at guiding the market and managing expectations.

The second explanation posits that data may be inflated to secure government subsidies. Under the guise of revitalizing manufacturing, some companies may falsely obtain federal subsidies, investing minimally in actual manufacturing, and focusing primarily on short-term gains.

The third explanation suggests a covert strategy to conceal underlying economic issues. Historically, the significant strengthening of the U.S. dollar has often coincided with wealth transfers from other nations. However, as the financial resources of smaller countries become insufficient to meet U.S. demands, the U.S. has sometimes resorted to financial maneuvers against major countries.

This conflicting economic data clouds the true state of the U.S. economy, preventing those responsible for producing these figures from fully understanding the severity of the situation and taking appropriate macroeconomic actions.

Given the potential discrepancy between the optimistic economic data and the actual situation, it's crucial to consider the following trends in the U.S. economy:

First, the revival of the manufacturing sector is losing momentum. Foreign investment in the U.S. computer and electronic industry has continued to grow, increasing from $170 million in 2021 to $54 billion in just over a year.

However, the sustainability of this trend is questionable. There are concerns about whether domestic manufacturing in the U.S. can independently recover if government support diminishes.

A report from the National Economic Council (NEC), released in August 2023, revealed that the growth in manufacturing investment was not solely attributed to new capital inflows. Instead, it was partly due to the reallocation of funds from other sectors, influenced by government tax incentives and policy support. Continuous financial backing from the U.S. government for the manufacturing sector could lead to further diversion of investment from other areas, potentially harming the overall economy.

Furthermore, financial markets are undergoing a downward adjustment. Should the Fed continue its tight monetary policy, it could weaken confidence in financial markets, leading to investor withdrawals and significant volatility.

From the start of 2023 to Aug. 9, the Nasdaq Composite Index experienced a 57 percent surge, mainly driven by the top 10 stocks, which accounted for 91 percent of the overall gains. In contrast, a significant number of smaller companies, with market values below $2 billion (totaling 3,079), showed poor performance, contributing only 1 percent to the overall gains.

By early July, the collective market value of the “Magnificent Seven” companies in the S&P 500 – Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla – had reached an impressive $11 trillion. This figure represented nearly a quarter of the total market value of the S&P 500, equivalent to three times the GDP of Germany.

Nevertheless, the remaining 493 companies in the S&P 500 saw minimal growth in their total market value.

It's important to note that technology stocks are particularly sensitive to interest rates. Prolonged high interest rates could exert downward pressure on these stocks.

A significant drop in technology stock prices has the potential to trigger a “market avalanche” in U.S. financial markets. In such a scenario, the U.S. economy might experience a notable slowdown in growth as early as the fourth quarter of 2023.

The U.S. real estate market, also sensitive to interest rates, is currently experiencing turbulence. Data shows that vacancy rates for commercial office properties are significantly higher compared to industrial and logistics properties.

The Fed's tightening of monetary policy has increased financing costs in the real estate industry. This shift is placing pressure on illiquid assets like commercial real estate, leading to decreased profitability for investors and a higher risk of defaults.

Elevated market interest rates could disrupt the prosperous cycle of the U.S. real estate market, beginning with commercial real estate and potentially causing a ripple effect throughout the entire market. Such a development could lead to a decrease in housing prices, reduced consumer spending, and a decline in the quality of bank assets.

To fully understand the state of the U.S. economy and its attractiveness to international capital, it's essential to look beyond official government data. Investors also consider factors like geopolitical dynamics, the risks of military conflicts, and various smaller-scale indicators. These additional considerations are crucial in assessing the gap between official statistics and the actual situation, enabling them to make well-informed judgments and decisions.

Song Xiaojun is deputy director of the Research Institute of China Construction Bank. Yu Xiang is a senior expert at the Research Institute of China Construction Bank.