March 01, 2013 at 09:42 AM EST
Chinese Economy Worse Than We Think?

The health of the Chinese economy is deteriorating, and it will have a significant impact on U.S. economic growth.

Almost half of the provinces in the Chinese economy are expecting an economic slowdown. They are lowering their growth targets. According to Nomura Holdings Inc., 14 provinces in the Chinese economy have lowered their target for gross domestic product (GDP) this year compared to 2012, and 17 have left it unchanged. (Source: Bloomberg, February 27, 2013.)

The Chinese economy only grew by 7.8% in 2012, compared to an average 10.6% over the past 10 years.

In addition to this, the country is facing a slowdown in its exports. According to the HSBC Flash China Purchasing Managers’ Index (PMI), exports from China have decreased, resulting in the slowest factory growth level in four months. The PMI had a reading of 50.4 in February 2013, compared to 52.3 in January. (Source: HSBC, February 25, 2013.) Any PMI reading below 50 indicates a contraction in manufacturing.

The economic slowdown in the Chinese economy seems to be ramping up, and it’s affecting other countries as well. Take South Korea, for example; the country’s industrial production fell due to an economic slowdown in China and weaker demand from the eurozone. South Korea’s GDP grew by only two percent for 2012, which marked the slowest growth in three years. (Source: Dow Jones Newswires, February 27, 2013.) The central bank of South Korea also cut the country’s growth rate for 2013 from 3.2% to 2.8%.

An economic slowdown in the Chinese economy is something very important to watch.

Consider companies like NIKE, Inc (NYSE/NKE), and YUM! Brands, Inc (NYSE/YUM). These companies, among others, operate in the Chinese economy; but unfortunately, they showed weak results in their most recent earnings reports. (Source: Wall Street Journal, February 24, 2013.)

If the economic slowdown in the Chinese economy dwindles any further, U.S.-based companies will face issues, as their ability to earn income will weaken. Dear reader, we are already seeing companies cutting costs by reducing their workforce because of bleak product/service demand from consumers in the U.S. and elsewhere in the world. An economic slowdown in the Chinese economy will force further cuts.

The current, most-quoted unemployment rate in the U.S. is 7.9%. But that number will skyrocket if conditions in the Chinese economy become more severe than they already are, as the Chinese economy is the second-largest economy in the world.

What He Said:

“Starting two years ago I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

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