The ties that bind the Chinese economy to US jobs outlook

Author: Gary Harloff

Covestor model: Opportunistic ETF

It is not well known, but the U.S. unemployment rate is correlated with the Chinese growth rate. The curve is double valued–that is, a Chinese GDP growth rate of 10% can result in either a U.S. unemployment rate of 5.5% or 9.7%. Right now, the Chinese GDP growth rate is 7.6% for the second quarter of 2012.

This is reduced from 11.9% in the first quarter of 2010. The average U.S. unemployment for the second quarter of 2012 is 8.17%, down from 9.77% for the first quarter of 2010. The dual mandate of the Fed is to promote low unemployment and price stability. But since Fed Chairman Ben Bernanke can’t influence the Chinese growth rate, he really can’t directly control U.S. unemployment.

Over the past couple of decades, U.S. managers have moved as many jobs to China as they can, and have cut U.S. research and development spending. This hollows out U.S. middle class jobs and manufacturing jobs. Now that China controls much of the world’s production facilities, it is time to recognize that China has a direct and large effect on U.S. unemployment.

Our analysis indicates that style-box funds, sector indices, and world indexes, are weak buys. Small caps have slightly better absolute price momentum (HVI) than large caps and the Nasdaq Composite Index. Oil and utilities have positive momentum whereas semiconductor and the (XAU) Philadelphia Stock Exchange Gold and Silver Index are both negative.

Internationally, Frankfurt and London exchanges have higher price momentum than the US. The U.S. dollar index and emerging markets are weak but positive. We like telecom, utility, energy, and biotech at this time.

We have buys on the S&P 500 Index (SPX), Nasdaq 100 (NDX), and a new buy on bonds. We also have a new sell on gold. Because the markets can turn quickly, be ready. May the market be with you.