China has rebalanced away from a dependence on exports, heavy industry and investment: Consumption accounted for 58 percent of GDP growth during the first three quarters of this year. Shrugging off the mid-June fall in the stock market, real (inflation-adjusted) retail sales actually accelerated to 11 percent in October and November, the fastest pace since March. China has remained the world’s best consumption story.
Unprecedented income growth is the most important factor supporting consumption. In the first three quarters of this year, real per-capita disposable income rose more than 7 percent, while over the past decade, real urban income rose 137 percent and real rural income rose 139 percent.
The strong consumer story can mitigate the impact of the slowdown in manufacturing and investment, but it can’t drive growth back to an overall 8 percent pace.
So we are far from the gloomy forecasts of analysts who blindly trust GDP statistics aggregating very disparate sectors or, worse, who mistake stock-market fluctuations for evidence of economic strength or weakness.
Measurement Lags Reality
I am not a fervent disciple of the “This Time Is Different” School of Economics. In fact, I have often argued the opposite—that, over its cycles, history tends to “rhyme,” for example, in “AOL, RCA, and The Shape of History,” (Tocqueville, 2/2/2000). Still, economies do change over time, and one of the problems of economic analysis is that the way in which we measure activity or growth often lags well behind changes in the real world.
In the late-1980s, for example, Tocqueville Asset Management argued that America’s manufacturing was not dying, as the consensus then proclaimed, but was in fact being reborn, as became apparent in the 1990s. One of our main arguments, articulated with the help of Harvard Professor Robert S. Kaplan in the book, Relevance Lost: The Rise and Fall of Management Accounting, was that corporations were still using accounting methods invented in the 19th century, when basic, heavy industries dominated economic activity.
In these “ancient” times, raw materials and direct (or “touch”) labor constituted up to 80 percent of total manufacturing costs. It was thus acceptable, when analyzing companies’ sources of profits, to allocate “indirect” costs (those difficult to impute to specific activities or products) in proportion to the easier-to-measure costs of materials or direct labor. But by the 1980s, electronics and other newer and lighter industries used fewer raw materials; their direct labor rarely exceeded 5 to10 percent of total costs. As a result, a situation had developed where a majority of total costs was allocated arbitrarily based on the small portion that was easily measurable.
This obsolete accounting method grossly misestimated which corporate segments were profitable or not, so that corporate strategies often continued to fund less-profitable, traditional activities instead of investing in potentially more-profitable opportunities. This had been detrimental, not only to the competitiveness of individual companies, but also to the overall U.S. economy. Fortunately, by the late 1980s, a more accurate approach to cost accounting was being adopted, which augured well for a U.S. economic revival.