The United States is enjoying disinflation without recession, whereas China’s economy is slumping and could be heading for deflation. Let’s examine this tale of two divergent economies.

In America, we should be pleased with economic trends. But judging by the commentary I’ve been reading and hearing lately, there’s considerable discontent in the land.

Partisan belligerence is partly to blame. Those who hate the occupants of the White House won’t acknowledge any good news about the economy. The favorable statistics are dismissed as a pack of lies.

But the syndrome goes deeper. Regardless of political affiliation, some analysts are perpetual scolds who insist that inflation can’t come down until we all take our “cod liver oil” in the form of draconian federal budget cuts and sharply higher unemployment.

Notably, former Treasury Secretary Larry Summers (a Democrat) predicted last year that America would need to endure about two years of 7.5% unemployment to get inflation down to 2%.

To quote Homer Simpson: “D’Oh!” Summers was way off.

Soft landing ahead for the U.S. economy?

I’m a contrarian who habitually reads between the lines. But sometimes, it pays to greet positive news at face value.

For the month of July in the U.S., the unemployment rate was 3.5% and the annualized rate of increase for the consumer price index (CPI) was 3.2%. The Federal Reserve projects third-quarter year-over-year gross domestic product (GDP) growth of 4.1%. S&P 500 companies are projected to return to year-over-year earnings growth in Q3 and Q4.

The Commerce Department reported Tuesday that U.S. retail sales continue to show resiliency, despite inflation worries and aggressive Federal Reserve tightening. Overall, retail sales climbed 0.7% in July versus June, beating consensus expectations. Nonstore retailers, a category that encompasses e-commerce, climbed 1.9% in July from June. The American consumer is hanging tough.

In another auspicious sign for the economy, home improvement retailer Home Depot (NYSE: HD) reported quarterly results Tuesday that beat expectations.

Cyclical and small-cap stocks have joined the stock market rally, a reflection of economic optimism. But as always, we still face risks.

Rising interest rates exert a lagging effect, so we may get a few unpleasant surprises in the next batch of economic data. A catastrophic turn for the worse in the Russia-Ukraine war could derail supply chains again and cause a spike in inflation, especially among the volatile food and energy components.

China struggles…

Also worrisome is China’s sputtering growth, which casts a pall over the global economy. Indeed, China’s inflation rate has fallen to roughly zero and the big worry now about the world’s second-largest economy is deflation.

China reported on Tuesday a terrible series of economic numbers that spooked investors and sent domestic and international stocks lower. The main U.S. equity indices finished the day’s session in negative territory as follows:

• DJIA: -1.02%
• S&P 500: -1.16%
• NASDAQ: -1.14%
• Russell 2000: -1.29%

China’s industrial production rose by 3.7% in July from a year ago, versus 4.4% expected, largely due to weak manufacturing activity and mining output (see chart).

China’s exports plummeted by 14.5% year-on-year in July, following a 12.4% drop in June. Retail sales in July only increased by 2.5% from a year ago, far below consensus expectations for a 4.5% increase. Fixed asset investment rose by 3.4% for the first seven months of the year from a year ago, below the 3.8% forecast.

The urban unemployment rate edged up to 5.3% in July from 5.2% in June. And China’s refusal to even release youth employment numbers this time around didn’t exactly instill investor confidence. Chinese stocks fell Tuesday.

Rising joblessness among the country’s young has been a thorny problem and could even prove politically destabilizing. Unemployment in the age 16 to 24 category reached a record high of 21.3% in June.

The real estate sector in China continues to struggle with massive debt and defaults. China is the world’s growth engine; Tuesday’s numbers are genuine cause for concern. Beijing responded with rate cuts, a desperate measure that might not do much good.

In an otherwise sanguine global economic backdrop, China has emerged as a wild card. But let’s give the U.S. economy its due. The bulls still have the upper hand.

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John Persinos is the editorial director of Investing Daily.

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