Will China’s Slump Affect US Economic Recovery?

The latest Purchasing Managers’ Index (PMI) figures out of China should make American economic policy makers and pundits worried. China’s December PMI slipped to 50.1, down from November’s 50.3 figure. This bit of bad news comes at the heels of a recent spate of official figures that indicate China’s economy is slowing down. Chinese manufacturers are in a tight spot between declining global demand and rising local costs. Add to this, the huge amount of private debt as well as massive overbuilding in the local overheating real estate market and one might suspect the ingredients for a ‘perfect storm’ is in the offing.

China’s discouraging economic realities on the ground might trigger another round of government stimulus to forestall further weakening. If you factor in the fact that all these prognostications and inferences are based solely on government-supplied figures, it gives rise to the suspicion that the economy in China might be worse than we can imagine. Keep in mind that there is a current overproduction of housing in China which might trigger another property market-led bust reminiscent of what happened in the US.

On the other end of the Pacific, the US economy is booming along at a GDP clip of over 5 percent. That’s a very welcome figure considering that the US was barely inching along for many quarters after 2008’s financial crisis. Across the board of economic indicators, from market sentiment as judged by the Dow Jones Industrial Average to consumer confidence and employment, the US economy looks like it is finally making a comeback. The much talked about recovery finally looks like it is taking form in such a way that it is beginning to be felt on Main Street not just Wall Street. With that said, China’s continuing economic slow down might impact US economic recovery. Europe is, for the most part, already slowing down. Add China to the mix and we’ve got a very worrying situation indeed for the US economy. Short term impact? Expect the dollar to keep rising.