(What’s Left of) Our Economy: A Great Oil Month and Still the July Trade Deficit Worsened

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Canada, China, EU, European Union, exports, high tech goods trade, imports, Made in Washington trade deficit, manufacturing, merchandise trade, NAFTA, North American Free Trade Agreement, oil, recovery, South Korea, Trade, trade deficit, trade surplus, Trump, {What's Left of) Our Economy

The combined U.S. goods and services rose sequentially in July (by just 0.33 percent) for the first time in three months even though America’s oil trade improved so much that in inflation-adjusted terms, oil exports set a new record high ($10.87 billion), and the oil trade deficit set a new record low ($6.80 billion). Moreover, in current-dollar terms, July’s $3.09 billion oil trade deficit was a 30.78 percent drop from June and the smallest since May, 2016’s $3.03 billion.

Nonetheless, not only did the monthly overall trade deficit worsen slightly; the seven-month year-to-date total ($319.10 billion) is up 9.60 percent from last year’s level, and the highest such figure since 2012 ($324.83 billion). Moreover, most of the bilateral goods shortfalls with countries that have drawn President Trump’s ire on trade rose on month, including Canada (where it more than doubled), South Korea (up 4.26 percent, partly on a 3.71 percent U.S. exports drop), and China (up 2.99 percent to a post-August, 2016 high). In addition, America’s goods sales to Canada sank on month in July by 13.85 percent – their biggest such decline since July, 2006’s 20.38 percent. The merchandise deficit with Mexico, however, fell steeply for the second straight month.

The huge, chronic manufacturing trade deficit rebounded sequentially by 4.61 percent as both exports and imports fell, but stayed 6.19 percent ahead of last year’s record pace, and although the volatile high tech goods gap tra and the volatile high tech goods trade gap dropped on month by 7.51 percent, it’s running 31.12 percent of last year’s rate and looks poised to reach an all-time annual high as well. The trade drag on the current, still sluggish American economic recovery dipped through the second quarter of this year, but has still cut its cumulative real growth by 17.31 percent, or nearly $463 billion.

Here are selected highlights of the latest monthly (July) trade balance figures released this morning by the Census Bureau:

>July saw record U.S. monthly real high oil exports ($10.87 billion), a record low real oil trade deficit ($6.80 billion), and the smallest current-dollar oil trade deficit ($3.09 billion) since last August ($3.03 billion). But none were enough to prevent the combined July goods and services trade deficit from rising slightly on month – by 0.33 percent, to $43.69 billion, from a downwardly revised $43.54 billion.

>The new inflation-adjusted oil exports record represented their second straight all-time high, beating June’s $10.35 billion mark by 4.95 percent.

>The new record low monthly after-inflation oil deficit bested the previous low of $7.56 billion, set in May, 2016, by 9.98 percent. It also represented a 14.10 percent drop from the June total.

>The July current-dollar oil deficit was 30.78 percent lower than June’s $4.47 billion level.

>July current-dollar oil exports rose 4.45 percent on month, to $10.24 billion. That was their highest level since November, 2014 ($11.14 billion).

>July current-dollar oil imports fell 6.58 percent, to $13.33 billion. That was their lowest level since last December ($13.82 billion).

>July also generally saw rising sequential trade deficits with countries identified by President Trump as difficult U.S. trade partners.

>As the second round of talks to redo the North American Free Trade Agreement (NAFTA) concluded, the U.S. merchandise trade deficit with Canada more than doubled on month, from $461 million to $1.01 billion. This represented the biggest percentage worsening of the deficit since July, 2016 – when a $25 million U.S. surplus turned into a $716 million shortfall.

>U.S. goods exports to Canada sank sequentially by 13.85 percent, to $21.88 billion – the biggest such decrease since July, 2006 (20.38 percent).

>It’s true that the July monthly surge in the merchandise trade deficit Canada followed a June plunge of 66.29 percent. But on a year-to-date basis, the American shortfall has nearly quadrupled, to $11.35 billion.

>A contrast was provided by the American trade ledger with Mexico, where the goods trade deficit fell significantly on month for the second straight month. The 17.37 percent sequential decrease drove the shortfall down to $4.92 billion – its lowest level since January’s $3.95 billion.

>U.S. goods exports to Mexico fell by 7.55 percent, to $19.74 billion, from a June level of $21.35 billion that was the second highest ever. But imports fell even faster – by 9.70 percent, to $24.66 billion. That was the biggest such drop since November, 2015’s 15.06 percent.

>All the same, the on a year-to-date basis, the U.S. merchandise trade deficit with Mexico is 11.94 percent higher than last year’s figure.

>All told, the total U.S. merchandise deficit with its NAFTA partners is 32.30 percent higher over the first seven months of this year than during the first seven months of last year.

>President Trump is also seeking to revise the 2012 U.S. bilateral trade agreement with South Korea, where the American merchandise deficit expanded by 4.26 percent on month in July, to $1.93 billion.

>U.S. goods exports to South Korea dropped by 3.71 percent sequentially, to $4.07 billion, and imports fell by 1.29 percent, to $6.00 billion.

>Year-to-date, the merchandise trade shortfall with South Korea is down by an impressive 30.31 percent so far in 2017. But on a monthly basis, it’s nearly 3.5 times greater than in March, 2012, when the trade agreement went into effect.

>Despite the rise of the yuan in recent months, the American merchandise trade deficit with China continued on its long-time upward track. In July, the shortfall set its second straight post-August, 2016 high – $33.56 billion – as it grew 2.99 percent on month.

>U.S. merchandise exports to China increased by 3.45 percent in July, to $10.05 billion. Goods imports from China rose by 3.10 percent, to $43.60 billion. That figure represented the highest such level since October, 2016’s $43.79 billion.

>Year-to-date, the U.S. merchandise deficit with China is up 6.80 percent as of July.

>More bad July trade news came from America’s commerce with the European Union (EU). The U.S. merchandise trade deficit rose by 7.90 percent on month to $13.45 billion – its highest monthly level since last November ($14.80 billion).

>U.S. goods exports to the EU tumbled by 9.80 percent, to $21.44 billion. That’s the lowest such total since January’s $21.29 billion, and the biggest decrease in these sales since July, 2016 (10.01 percent).

>America’s merchandise imports from the EU were off on month by only 3.71 percent. The resulting $34.89 billion total was the lowest since February’s $32.39 billion, and the biggest such drop since January’s 6.68 percent.

>At the same time, on a year-to-date basis, the U.S. merchandise trade deficit with the EU is only 0.95 percent higher than its comparable 2016 level.

>American manufacturing had another poor month in July as well. Its massive and chronic trade deficit rebounded sequentially by 4.61 percent to $79.64 billion.

>Manufacturing exports plummeted by 8.24 percent on month, from $95.41 billion to $87.54 billion. But imports were off only 2.54 percent, from $171.54 billion to $167.18 billion.

>Year-to-date, the manufacturing trade shortfall has widened by 6.19 percent, from $482.13 billion to $512 billion – indicating that it will set yet another annual record. (Last year’s was $853.07 billion.)

>High tech merchandise trade generated some goods news for the United States in July, at least over the short term. The deficit – which can be volatile on month – fell sequentially by 7.50 percent, from $8.82 billion to $8.16 billion.

>High tech goods exports fell by 5.13 percent, to $29.23 billion, while imports decreased by 5.66 percent, to $37.38 billion.

>Year-to-date, however, the high tech goods trade shortfall is up by 31.12 percent, and seems headed for a new annual record of its own.

>Thanks to revisions in a separate data series kept by the Census Bureau, the drag on U.S. growth during this so-far weak recovery created by the Made in Washington portion of the U.S. trade deficit dipped as of the second quarter of 2017.

>This deficit consists of U.S. trade flows heavily influenced by trade agreements and other trade policy decisions – thus omitting services and oil trade – that are then adjusted for inflation.

>Between the second quarter of 2009 – when the current recovery officially began – and the second quarter of 2017, the increase in this Made in Washington deficit has cut cumulative U.S. growth by 17.31 percent, or $462.82 billion out of $2.6744 billion in real GDP expansion.

>The previous calculable trade drag figure was $463.97 billion (17.47 percent) cut from $2.6551 trillion in cumulative real recovery era growth.

(What’s Left of) Our Economy: America’s China Trade by the (Industry-Specific) Numbers

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China, commodities, energy, exports, imports, manufacturing, Trade, trade deficit, trade surplus, {What's Left of) Our Economy

Last week, RealityChek analyzed in great industry-by-industry detail new government data illuminating U.S. trade trends for the first half of this year. This week, we’ll see how leading sectors of the American economy have fared versus Chinese competition during that period, and how it compares with their performance during the first half of last year. And we’ll also examine how America’s China trade in these respects compare with the nation’s global trade performance.

As with the global trade data presented last week, the industry categories used are those of the most granular level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing industry-specific economic data. I like this six-digit level because it draws the greatest number of distinctions between final manufactured products and the parts and components of these products. This distinction is critical because the rapid growth in recent decades of global supply chains (i.e., the rapid growth of American production offshoring) means that a large percentage of U.S. and global trade consists of trade in these manufacturing inputs.

Two other technical notes: First, because trade data for major aerospace products aren’t made public in order to protect corporate information considered proprietary, the six-digit NAICS results in this sector are unreliable, and the five-digit level data are being used. Second, because the release of services trade data lags considerably, these RealityChek reports cover only goods trade (which still comprises the vast majority of U.S. trade flows).

Let’s start with a list of the nation’s top ten goods exports to China for the first half of this year, and how their performance has changed in dollar terms since the first half of 2016:

1. Aerospace: -10.7 percent

2. Autos & light trucks: +26.0 percent

3. Soybeans: +30.6 percent

4. Waste & scrap: +19.2 percent

5. Semiconductors & related devices: -2.7 percent

6. Crude oil & natural gas: +3,250.2 %

7. Plastics materials & resins: +32.3%

8. Semiconductor production machinery: +7.1 percent

9. Pharmaceuticals: +45.2 percent

10. Miscellaneous basic organic chems: +15.7 %

And here’s the list of America’s top ten worldwide goods exports, and how these levels have changed since the first half of 2016:

1. Aerospace: -4.0 percent

2. Petroleum refinery products: +26.1 percent

3. Autos & light trucks: -8.5 percent

4. Special classification provisions: +9.7 percent

5. Semiconductors & related devices: +4.7 percent

6. Miscellaneous auto parts: +1.4 percent

7. Miscellaneous basic organic chemicals: +3.7 percent

8. Pharmaceuticals: +3.9 percent

9. Plastics materials & resins: +6.3 percent

10. Primary smelted non-ferrous metals: +54.0 percent

Both lists contain mainly advanced manufactured products, which is good for the U.S. economy because these sectors are great performers in terms of high wage job creation, innovation, and (historically, anyway) productivity growth. But some important differences between the lists can be seen, too. For example, the year-to-date swings in the China trade flows generally are much greater – both where American exports have risen and where they’ve fallen.

And then there’s the rocket ride taken by American crude oil and gas exports to China. These shipments alone accounted for more than 22 percent of the period’s increase in total U.S. goods exports to China. But how can that pace possibly continue?

Also noteworthy: The big increase in American car and light truck exports to China. Given the PRC’s ambitious plans to become a major automotive production power, (though one whose own output is still dominated by foreign- brand products) how much longer will Beijing remain content to import so many vehicles from abroad?

Speaking of imports, here’s the list of the top ten U.S. goods purchases from China and how they’ve changed between January-to-June, 2016 and January-to-June this year:

1. Broadcast & wireless comm: +26.4%

2. Computers: +7.9 percent

3. Telecomms equipment: +18.2 percent

4. Computer parts: -19.2 percent

5. Games, toys, childrens’ vehicles: +7.1%

6. Printed circuit assemblies: +50.0 percent

7. Audio & video equipment: -15.0 percent

8. Miscellaneous plastics products: +7.1%

9. Institutional furniture: +8.5 percent

10. Metal household furniture: +10.3 percent

And for comparison’s sake, here’s the corresponding list of America’s leading global goods imports:

1. Autos & light trucks: +4.5 percent

2. Crude oil & natural gas: +53.7 percent

3. Pharmaceuticals: +2.3 percent

4. Goods returned from Canada: +4.3 percent

5. Broadcast & wireless communications equipment: +10.3 percent

6. Computers: +6.2 percent

7. Telecomms equip: +8.2 percent

8. Aerospace products: -3.4 percent

9. Petroleum refinery products: +22.2 percent

10. Semiconductors & related devices: -6.4 percent

Unlike the global imports list, the China imports list is entirely comprised of manufactured goods. But they’re hardly all high-value manufactures. Indeed, four of the ten categories consist of relatively simple consumer goods, and three more fall into the consumer electronics area (including that leading broadcast and wireless communications sector, which contains smartphones). The only entry that qualifies as capital- and technology-intensive is telecomms equipment (although the Chinese content of consumer electronics products, and indeed of China’s exports generally, is rising strongly by all accounts).

As with U.S. worldwide trade, however, the big test of America’s competitiveness in China trade consists of the trade balance figures. For mainstream trade theory teaches that products that countries trade most successfully will turn out to be products that countries make most successfully.

So here are the U.S. goods categories running the biggest trade surpluses with China, and how these surpluses have changed between the first six months of last year and the first six months of this year:

1. Aerospace products: -11.58 percent

2. Autos & light trucks: +14.46 percent

3. Waste & scrap: +17.92 percent

4. Crude oil & nat gas: +3,228.07%

5. Plastics materials & resins: +29.94%

6. Semiconductor production machinery: -1.91%

7. Liquid natural gas: +66.25 percent

8. Sawmill products: +24.96 percent

9. Non-poultry meat products: +2.83%

10. Pulp mill products: +6.09 percent

If you agree that advanced manufacturing’s fortunes are central to the U.S. economy’s fortunes, this list is only mildly encouraging, at very best. Yes, the top two categories merit that label, along with plastics materials and resins and semiconductor machinery. But two of those surpluses have shrunk over the past year. And all the other categories are commodities or low-value products. They’re also the categories that saw the greatest trade surplus improvements.

Here are the biggest surplus sectors in America’s worldwide trade:

1. Aerospace products: -2.03 percent

2. Petroleum refinery products: +33.11 percent

3. Plastics materials & resins: +4.73 percent

4. Soybeans: +28.21 percent

5. Other special classification provns: +7.13 percent

6. Corn: +20.26 percent

7. Waste & scrap: -7.82 percent

8. Liquid natural gas: +56.54 percent

9. Semiconductor production machinery: +64.73 percent

10. Non-anthracite coal & natural gases: +223.22 percent

Interestingly, this global list is even more low-value and commodity-heavy than the list of the biggest bilateral China deficit categories. Moreover, here, too, it’s mainly the commodity and lower value products that have seen the biggest improvements in these surpluses.

Finally, let’s examine the biggest deficit categories in America’s trade with China, and how they compare with the global results. First, the China figures and how they’ve changed on a year-to-date basis:

1. Broadcast & wireless communications equipment: +29.14%

2. Computers: +7.56 percent

3. Telecomms equipment: +19.46 percent

4. Computer parts: -20.75 percent

5. Games, toys, children’s vehicles: +7.05%

6. Printed circuit assemblies: +49.77%

7. Audio & video equipment: -15.52%

8. Miscellaneous plastic products: +6.88%

9. Institutional furniture: +8.61 percent

10. Metal household furniture: +10.28%

The biggest total U.S. goods trade deficit categories and their similar increases and decreases?

1. Autos & light trucks: +10.64 percent

2. Crude oil & natural gas: +45.31 percent

3. Goods returned from Canada: +4.25 percent

4. Computers: +1.16 percent

5. Broadcast & wireless communications equipment.: +11.06 percent

6. Telecomms equipment: +19.10 percent

7. Printed circuit assemblies: +47.12 percent

8. Audio & video equipment: -11.50 percent

9. Institutional furniture: +8.56 percent

10. Iron & steel: +76.28 percent

On the value-added scale, the two sets of figures look pretty comparable. But here’s something revealing: Six of the categories appear on both lists, which certainly squares with the idea that the U.S. trade deficit problem is largely a China trade deficit problem. Something else revealing: Tariffs work. Just look at how important iron and steel are on the worldwide deficit list, but don’t even appear on the China deficit. That’s largely because of the steep punitive duties slapped on Chinese steel starting in 2015.

Next up: Which major sectors of America’s goods economy have seen the biggest year-to-date improvement and deterioration on the China goods front, and what do those figures augur for the nation’s economic, industrial, and technological future?

(What’s Left of) Our Economy: Are China’s Trade Delusions Growing?

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Andrew Browne, China, manufacturing, tariffs, The Wall Street Journal, Trade, trade surplus, trade wars, Trump, {What's Left of) Our Economy

It looks like China’s leaders have been swallowing a lot of their own propaganda about its rise to global prominence and its place in the world economy in particular. And since his election as president a week ago, these delusions of grandeur have surely been fed by tremulous predictions by the usual globalization cheerleaders that the United States – or at least many Americans – will lose big in any bilateral trade war Donald Trump might start.

How else to explain the warning issued by a state-run Chinese newspaper on Sunday that any Trump tariffs on Chinese goods will be met with a “tit-for-tat” response that would include the following consequences:

“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.”

And how Beijing must have chortled today when it read Wall Street Journal columnist Andrew Browne’s argument that

“Nobody wins in a trade war. If Donald Trump sparks one with China, among the losers will be some of his most ardent supporters: blue-collar workers who helped sweep him to election victory.

“In fact, they’ll stand to lose twice. They’ve already endured stagnant incomes for decades amid withering trade competition from China. Mr. Trump’s threatened tariffs of 45% on all Chinese imports would hit their pocketbooks again by raising the price of pretty much everything on sale in Wal-Mart, from sneakers to microwave ovens.”

“In fact,” if the Chinese newspaper writers really are reflecting their political leaders’ views, then their grip on reality is totally gone. For example, will the United States really be the only country that suffers if iPhone sales in the PRC are limited? Last I checked, nearly all these devices were assembled in China, where Apple and especially subcontractors are mass employers. Further, the Chinese content of manufactured goods across-the-board keeps rising, so Chinese workers across long domestic supply chains would be hit as well.

And limits on Chinese students in the United States? Is that a promise or a threat? First of all, for all of its recent advances, China still lags far behind America in terms of science and technology. China’s therefore clearly the big loser if Beijing denies its people access to that knowledge. Second, if China’s higher education system was such great shakes, why would the country’s plutocrats be so anxious to send their kids of American colleges and universities? Third, as Beijing knows best of all, many of the students it sends here are spies. Like it’s going to cut off such intelligence collection voluntarily? Finally, as I’ve written, as Chinese students have flooded into American education, so have China’s corrupt values.

More important, let’s not forget the broader economic context. Although it’s down some since 2015, China is still on course to run a nearly $350 billion trade surplus with the United States this year. And not only is trade more crucial to China’s growth than it is to America’s (and more important than official figures indicate), but that growth in turn is vital to China’s stability – and to the personal fortunes of its dictators and oligarchs. So could we please stop with the claims that these same Chinese leaders are going to launch a commercial attack on its top customer on net by far?

And when it comes to individual contracts, it’s not like the United States lacks options with other countries that would be tempted to seize the opportunity to replace American producers in the ranks of exporters to China. For most of these countries depend heavily on the U.S. market, too. Washington would have ample power to tell them credibly, “If you abet China’s retaliatory tactics, you can forget about trading with us.”

China of course is not devoid of clout. But it clearly still has much less than America’s. Here’s hoping a canny negotiator like President-elect Trump truly does recognize the real balance of global power, and moves vigorously to capitalize on America’s advantages while they last.

(What’s Left of) Our Economy: China’s Urgently Needed Rebalancing is Still MIA

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China, current account surplus, dumping, Europe, European Chamber of Commerce in Beijing, Financial Crisis, Global Imbalances, Great Recession, manufacturing, overcapacity, rebalancing, Trade, trade surplus, {What's Left of) Our Economy

One of the biggest hopes for vigorous, sustainable recoveries in the American and global economies is the widespread conviction that China will show real progress in shifting its growth strategy from one based on maximizing exports to one focused on expanding consumption at home. Recently, three sets of data have appeared making clear that, despite repeated balances by its government, such China rebalancing still remains much more hope than reality.

The first figures show that China’s chronic merchandise trade surplus hit an all-time record last year of $624.89 billion. That’s up from $380.20 billion in 2014 – a 64.36 percent jump. (These numbers come from my monitoring of China’s reported monthly trade figures.)  Since China’s 2015 economic expansion slowed to 6.90 percent – a 25-year low – the contribution to the country’s growth made by net exports by definition is on the rise.  And 2016 promises more of the same: China’s January merchandise trade surplus hit another new all-time monthly high of $63.35 billion.   

China’s broader international surplus – in its current account – is on the rise as well. It surged by no less than 33 percent on year in 2015, to just over $293 billion. More important, as a share of China’s economy, it hit 2.70 percent – the highest level since 2010. It’s true that this surplus compared with the Chinese gross domestic product is far from its pre-financial crisis levels. But it’s also true that global growth is much weaker as well.

Finally, this morning, the European Chamber of Commerce in Beijing has just released a report showing that, contrary to the Chinese government’s promises, industrial overcapacity is getting worse, not better. As a result, China keeps exporting this glut – which the Chamber reminds is the inevitable consequence of Chinese government policies – at artificially low prices.  Therefore, jobs and valuable output keep being taken from China’s trade partners for reasons have nothing to do with free markets, global deflationary forces keep strengthening, and the world economy keeps building up the kinds of distortions that set the stage for the financial crisis and ensuing Great Recession.

According to the Chamber study, six of the eight major Chinese industries it examined not only continue producing far more than the domestic economy can consume: paper and paperboard, flat glass, steel, refining, aluminum, and cement. These levels of overcapacity have worsened in recent years – due largely to cheap credit from state controlled banks and support from local officials desperate to prevent China’s overall slowdown from boosting unemployment and political instability in their backyards.

The European Chamber has warned Chinese and European officials that China’s overcapacity “leads to job loss, which leads to protectionism in Europe” – warnings that sound credible given that they come from the continent’s powerful business lobby. At the same time, the absence of such warnings from America’s powerful business lobbies is likely sending another message entirely to Beijing: that China can remain on the overcapacity course, and keep avoiding economically and political risky real rebalancing, simply by dumping even more of its surplus production in a U.S. economy that can ill afford it, either.

(What’s Left of) Our Economy: Don’t Play Taps for China Just Yet

Tags

China, competitiveness, import prices, labor costs, manufacturing, Trade, trade deficit, trade surplus, {What's Left of) Our Economy

It’s getting to be a familiar pattern: Western analysts add to the mountain of predictions that China is cruising toward a major economic bruising. And data from China at the least sends a dramatically different message.

The China bear meme of the moment has been generated by two Asia-based Merrill Lynch analysts, who argue that the People’s Republic “may be entering an asset-deflation phase” and therefore is in danger of falling into the deflationary trap from which post-bubble Japan has been struggling to escape for two decades. No less than BusinessWeek and TIME have picked up the study.

These claims come on the heels of years’ worth of proclamations that China is rapidly losing its manufacturing competitiveness, largely because its labor costs are rising so fast.

All of this may be true. Certainly, China has its share of big economic problems – and consequently big political, environmental, and social problems, too. But talk about bad timing! The Merrill Lynch report was written up just before the release of new data from Beijing showing that, in August, China’s monthly trade surplus hit its second new record high in a row.

The $49.8 billion excess of imports over exports brought the PRC’s year-to-date surplus to $199.61 – 28.24 percent higher than last year’s comparable total. And although there’s ample reason to be skeptical of all Chinese economic data, China’s July surplus of $47.3 billion tracks well with Census Bureau statistics showing that China ran a record $30.08 billion trade surplus with the United States that month. (The August U.S. figures will be out Oct. 3.)

The second piece of evidence undercutting “whither China” speculation was released today, in the form of U.S. figures on import prices. These Labor Department statistics showed that between July and August, Chinese goods (overwhelmingly manufactures) bought by Americans got cheaper faster (falling in price by 0.1 percent) than all manufactures imports (down 0.09 percent). And year on year, prices of Chinese imports have been rising at only about half the rate (0.19 percent) than manufacturing import prices overall (0.35 percent).

Years of recent official and policy establishment bullishness about the U.S. economy haven’t prevented the current recovery from remaining historically lousy. Don’t count on similar bearishness about China to have significantly greater effects.