China’s latest Purchasing Managers’ Index (PMI) hit 55.7% in April vs. 55.1% in March. Goldman Sachs highlights how input prices alone jumped 7.5%m signaling that PPI inflation will likely rise rapidly in the future. At the same time, the exports sub-index remained at its highest level since April 2008.
Interestingly, they adjust Chinese PMI data since they believe it shows too much seasonality, even after being ‘seasonally adjusted’:
Activity growth remains strong: we have been highlighting the issue that the official series shows clear seasonality despite the fact that it is assumed to be seasonally adjusted already. As a result, we have been re-adjusting the official series for seasonality which we believe has served us better as a gauge of real economic activities. This re-adjusted series has been trending down continuously since December 2009 (the darker line in Exhibit 1) which has led some observers to believe that there has been a significant slowdown in sequential activity growth.
However, we believe there is not sufficient evidence to support this view as other economic indicators, including the official 1Q2010 GDP data point to continued strength in real activity growth. We believe this slowdown in the re-adjusted series possibly reflects the unstable seasonal bias (see Exhibit 3) while real activity growth remains robust. Given that the output gap has already closed and even the official GDP data, which is likely to be understated in recent quarters, suggest sequential growth in 1Q2010 was above its potential level, the economy is still facing significant overheating pressures down the road. On the other hand, we believe the risks of a major double dip in the real economy is very low given robust corporate profits growth (60% qoq s.a. ann. in January-February) and continued strength in broad money supply growth (1Q2010 qoq s.a. ann. growth was 24%).
Net-net, Goldman believes that overheating remains a substantial risk for the Chinese economy, while the risk of a double-dip remain very small.
This view coincides with China’s recent focus on slowing down growth, rather than fending off a potential ‘double dip’ in growth.
(Via Goldman Sachs, China PMI, 1 May 2010)