First-year students of statistics are routinely warned that, “On average, every person has one ovary and one testicle.” More seriously, they may be told the story of the six-foot man who drowned in a river with an average depth of four feet.
These quips are supposed to prevent students from mindlessly using irrelevant or misleading statistical averages or aggregates. Yet economists often do just that when they measure a country’s or a region’s activity and growth rate by using statistics that bundle together sectors or jobs that, in reality, behave quite differently from each other.
Often, a single macroeconomic statistic aggregates or averages components that could signal either economic weakness or an acceleration with the potential to rekindle inflation. The resulting uncertainty probably is why, today, the major central banks still hesitate between more monetary easing and its opposite, a return of higher interest rates.
Math, Myths And Misunderstandings About China
We see one of the most obvious current examples of how misleading averages and aggregates can be in the ongoing, so-called “rebalancing” of the Chinese economy.
Several years ago, Andy Rothman, one of the most astute and least “bipolar” analysts of the Chinese economy, acknowledged an emerging consensus that the country’s GDP would soon slow down from its breakneck pace of more than 10 percent growth per annum. He warned, however, that this slowdown would not happen evenly across the board.
Once the huge pent-up demand for infrastructure, plant construction and housing was satisfied, these sectors would settle into the lower growth rates typical of more-developed economies. However, household spending was still in its infancy, and would probably continue to grow at double-digit rates. It thus would remain “the world’s best consumption story”; but since it could not physically be expected to accelerate beyond the annual 11 percent of recent years, China’s GDP would naturally settle into a much slower growth trend. That, however, would not necessarily be cause for alarm.
Rothman recently updated his views in “Which China Are You Looking At?” (Matthews Asia, December 21, 2015), from which I paraphrase some snippets with my own emphasis added:
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Exports haven’t contributed to GDP growth for the past seven years. Only about 10 percent of the goods rolling out of Chinese factories are exported. China largely consumes what it produces.
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Manufacturing is sluggish, especially in heavy industries such as steel and cement, as China has passed its peak in the growth rate of construction of infrastructure and new homes. But factory wages are up 5 to 6 percent this year, reflecting a fairly tight labor market, and more than 10 million new homes will be sold in 2015. Manufacturing has not collapsed.