Is China's slowdown worse than previously estimated?

The seeming slowdown in China's business conditions we saw this year were often attributed to the Chinese New Year holiday, which came early this year. Unlike most holidays in the West, the Chinese New Year actually brings a great deal of manufacturing and other business activities to a halt - often at the expense of timely delivery of customer orders. The tight labor conditions in recent years have made that slowdown even more pronounced.

CNN: During the Chinese New Year... factory output grinds to a halt as many of the migrant workers return to their home provinces during a two- to four-week period.

Large and small companies have adjusted their business models over the years to accommodate the holiday. But those adjustments have not taken into account new economic trends in China, which are whittling down the country's factory workforce. Fewer workers have meant delayed shipments and lost sales for small U.S. companies, some owners complained.

The floating Lunar New Year holiday has made seasonal adjustments quite difficult. With the holiday being  early this year, comparisons to previous years became somewhat unreliable. For example the slowdown in auto sales may have been overstated.

The ISI Group has done some extensive work to adjust for this effect. The chart below shows the March MNI Business Condition Survey in China (blue) and the ISI's seasonal adjustment (purple). According to this adjustment, the survey may be pointing to business conditions that are worse than anything we've seen since 2009.

Source: ISI Group (click to enlarge)

As more March economic numbers come out, we should be able to get a clear picture of the growth trend in China. The MNI survey however may be an early sign of a more severe slowdown than previously estimated.

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