Realizing the Ripple Effects

 | Dec 09, 2011 | 2:30 PM EST  | Comments
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This morning, China released a number of economic data points, and, in the U.S., we received the International Trade data from the Census Bureau. Assessing the impact of the Chinese economy on the U.S. is not as simple as tabulating our direct exports to China. If it were, we could merely observe that the export of U.S. goods (excluding services) to China accounts for only about 0.6% of our economy. Even a sharp slowdown in these exports would not move the needle on the U.S. economy very much.

A more complex view demonstrates that the impact on U.S. corporations will be different than the impact on the broader U.S. economy, but some of the effects on our economy are not necessarily bad. After all, with less demand for commodities, perhaps our own inflation rate might ease.

That said, Standard and Poor's released a research report in August that showed S&P 500 companies derived 6.1% of their sales from Asia in 2010. (The report does not break out sales by country, as the data depend on how companies deliver their earnings.) Overall, 46.3% of sales for these companies came from abroad. . In 2010, companies in the S&P 500 derived $300 billion in sales to Asia, down from $357 billion in 2009.

Many foreign economies from which U.S. companies obtain their sales depend on exporting -- often, natural resources -- to China. For example, declining imports of raw materials by China from, say, Australia, can affect our exports to that country; U.S. exports to Australia accounted for  $3 billion of goods in October. China imports raw materials and other inputs from many other countries, which, in turn, import from the U.S.

Before discussing how China's economic conditions affect us here, let's first look at what the recent data from China show:

  • Annual consumer inflation fell to 4.2% year-over-year, slightly below expectations and the lowest rate since September 2010. This was the first time since February that it fell below 5%. As recently as July, it had reached a three-year high of 6.5%; now, it is near the government's target of 4%.
  • Producer price inflation fell by a much sharper amount -- down to 2.7% in November, roughly half the annualized rate of October -- and even reached a negative print month over month. High inflation has the potential to spark civil unrest in China, and Beijing wants to avoid that at all costs. Lower inflation can allow China to pursue more growth initiatives, without as much concern about inflationary repercussions.
  • Industrial output growth slowed to 12.4% in November from 13.2% in October, which was below expectations and the weakest since August 2009, according to Reuters data.
  • Last week, we saw that the official purchasing managers index for China contracted, falling to 49.0 from 50.4, while a separate measure from HSBC showed that it fell to 47.7, the lowest level since March of 2009, and the sharpest drop since August 2008, when the U.S. was in recession.
  • In slightly better-than-expected news, China's retail sales increased 17.3% from a year ago and a bit above October's 17.2% gain; it also beat economists' expectations of a drop to 16.9%.

Together, these data suggest that China may embark on more pro-growth policies, such as the recent decision to cut bank reserve rates by 0.5 percentage point to increase lending, which could release between 350 billion yuan to 400 billion yuan (about $55 billion to $63 billion) into the banking system, and other potential monetary stimulus measures.

In the meantime, what can we expect for the U.S. economy? In this morning's release of the International Trade report from Census, we learned that the trade deficit of goods with China in October, which doesn't capture the most recent data from China, was unchanged at $28.1 billion, the same as September. Behind this number was an increase in both imports and exports. Our imports from China increased to $37.8 billion from $36.4 billion, while our exports to China increased to $9.7 billion from $8.4 billion.

One should view these trade data with respect to the U.S. GDP, which is $15.2 trillion. U.S. exports of goods to the EU were $23.4 billion in October, which is considerably more important to the U.S. economy than are our exports to China. But, the EU is also China's biggest trading partner, and slowing growth in Europe could translate to slowing growth in China. In a globally intertwined economy, one must consider the ripple effects.

While the impact on a slowing Chinese economy could be problematic for U.S. companies that derive a significant portion of their sales from there, it might not be entirely bad for the U.S. economy. Given that our exports to China is a rather small percentage of our GDP vs. the effects of China's consumption of raw materials that drives our inflation rate up, perhaps a bit slower growth in China might mean a lower tab for fuel and other commodities.

Still, considering the trade avenues beyond the simple U.S.-China route, we might surmise that trade could suffer a bit on a global basis, especially given a possible simultaneous recession in Europe. The follow-on effects of fewer orders from China to its suppliers might mean fewer exports from the U.S. to those regions, even as it might help ease some of our raw materials costs.

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