Chinese economy down 4%, US house prices still falling

Perhaps the most significant economic data to emerge yesterday was the four per cent contraction in Chinese electricity consumption in the first quarter, generally considered a better proxy for GDP growth than the official figures, and the 18.7 per cent drop in US house prices in March, according to the Case-Shiller Home Price Index of 20 cities.

These are what is known as hard economic data. Wall Street chose to focus its attention on the US Conference Board’s Consumer Confidence Index which it has successfully managed to talk up. US consumers are apparently less pessimistic about the future, which has some merit unless their perception is incorrect because they have been misled.

German confidence

It is the same story in Germany. The worse GDP decline since 1990, and yet suddenly confidence has picked up. German GDP fell 6.9 per cent in Q1, and exports by 9.7 per cent, worse than expected.

Then again Russian President Dmitry Medvedev yesterday warned that his country faced a recession 50 per cent worse than in 1998. Presumably then Russians are now feeling more confident about the future. South Africa is officially in its first recession for 17 years. They must be dancing in the streets. So what is going on?

This just has to be human psychology and a response mechanism to bad news. At first there is a very nasty shock and depression. Then the mood lightens and perhaps it does not seem as bad as first feared. The danger then is becoming over optimistic about the future for no good reason.

That would appear to be where consumer confidence and stock markets stand right now. The problem is that when you think rationally there is nothing to be confident about. All that has happened is that the human mind has adjusted to worse conditions, which are still worsening but not quite as fast as at the start. This is not good news.

Optimistic fallacy

If you now blithely behave as though nothing has happened and that things will inevitably get better then in the investment context you will put your money into the stock market, and then lose it when the truth inevitably returns to revalue the market. Or if you run a business you will carry on until your cash flow is completely exhausted.

Better to be a realist, observe those economic growth and housing figures and reflect on what it means for the outlook. Another bout of US foreclosures are expected to take house prices lower again this summer, and what do you think is happening to global demand for Chinese manufactured goods?