What I Care About This Week | 2021 Apr 12

Photo by Aleksandar Pasaric on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • On Tuesday, we get the latest read on inflation. Producer prices posted much higher than expected last week, though higher input costs have yet to be passed on to consumers. Food and energy have begun to run pretty hot, but the Fed likes to factor those out and look more closely at consumer goods. Even so, a headline inflation rate much higher than the expected 2.5% year-over-year would almost certainly push stock and bond prices down.

  • Retail sales also post this week (Thursday), with the consensus hovering around a 5.9% expansion (though some estimates are as high as 7%!). Consumer spending is a key variable to the ongoing economic recovery—fully 2/3rds of the US economy is just people buying stuff. The stimulus program in March and the effects of the extreme weather in February are expected to combine to produce solid growth figures in retail sales!

  • Biden has proposed a $2.3 trillion infrastructure package. Republicans have balked at the size of the deal, and even some moderate Democrats are expressing concern, both appear willing to consider a more targeted approach. That said, top Democrats seem more willing to move forward without bipartisan support. In either case, it is expected that a spending bill of this size would be mostly funded by newly-created money from the Federal Reserve. As with all monetary supply expansions, this has the side effect of driving up asset prices, and I expect this to be little different. Again, it is my view that so long as monetary policy is easy and the money supply is expanded, the bias in prices is up.

The Details & Chart of the Week

The ascension of China as the world’s economic superpower is so often talked about that the standard assumption is not if but when. It is easy to see why this is the standard assumption. Most economic growth models carry population and productivity as inputs, and with a population of 1.4 billion people, China need only slightly increase productivity to massively increase economic output.

Yet the not-so-often-talked-about addendum to this discussion is that, in the modern economy, not all economic output is created equal. The leaders of today’s economy do not compete just in manufacturing, but rather in information and technology. Today’s economic leadership is not defined by productivity on a factory floor.

In this week’s chart, Fathom Consulting illustrates the economic areas that China has both gained and lost ground over the past 15 years. These are not necessarily drawn from official figures, so they have sorted out some of the politically-biased reporting that we’ve come to expect from China’s official figures. What I find interesting is how China has held her own in several important fields—IT, New Energy, New Materials, and Medicine. She has lost substantial ground, however, in other key industries like Robotics, Aerospace, and Agriculture. Advanced Railway and Maritime Engineering are the only two places China has significantly increased her competitive advantage.

Said differently: it may well be that, through sheer numbers and ongoing productivity gains, China overtakes the US in economic output, but it is not raw output that matters. The type of output matters more than the absolute value of that output. South Korea is a perfect illustration of this fact. Though they are the 10th largest economy by output, they remain among the most important technological economies, ranking 1st on the International Innovation Index (China ranks 15th, and the US ranks 2nd). And remember, innovation is just a fancy word for an improving quality of life.

In the end, China has substantial ground to cover to gain a competitive advantage in the advanced modern economy. It isn’t enough to simply modernize or hold pace, since other countries continue to advance—she must advance more rapidly than other countries to gain true leadership of the global technological economy.

And even when China is the largest economy in the world, I find myself skeptical that this somehow dooms other countries to serfdom. Quality of life will continue to improve so long as innovation is central to our economic thinking.

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