China’s stock market woes complicate economic forecasts

Not only did China’s benchmark Shanghai Composite Index finish July down 15 percent, the largest monthly decline since the summer of 2009, but also the Chinese economy — the world’s second-largest — is slowing.
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Not only did China’s benchmark Shanghai Composite Index finish July down 15 percent, the largest monthly decline since the summer of 2009, but also the Chinese economy — the world’s second-largest — is slowing.

Not only did China’s benchmark Shanghai Composite Index finish July down 15 percent, the largest monthly decline since the summer of 2009, but also the Chinese economy — the world’s second-largest — is slowing.

As China’s stock market decline continues, there are fears that the Asian giant’s problems will affect the United States and other major world economies. As CNN Money pointed out, that would be troubling because the global economy is growing slowly and governments have few ways left to boost economic activity.

"We need all the growth we can get. A slowdown in China wouldn't help," David Joy, chief market strategist at Ameriprise Financial, told CNN Money.

Trade between the United States and China could decline, although consumer spending accounts for two-thirds of U.S. economic activity and exports make up just 13 percent of the gross domestic product, so the effects of such a development probably would be limited.

Parts of the U.S. stock market are exposed to China because 40 percent of the revenue that S&P 500 companies generate comes from overseas. A plunge in Chinese growth would hurt multinational companies. There also are concerns that toxic loans in China might trigger a financial crisis in that country that could spread globally.

"A financial panic ... could potentially plunge the world into recession, particularly if it spread throughout Asia," George Hoguet, global investment strategist at State Street Global Advisors, told CNN Money, but he believes the Chinese government would step in before such a crisis occurs.

China has already spent heavily to stop the stock market plunge and its central bank has aggressively lowered interest rates.

The U.S. marine industry continues to look longingly at China. The country has more than 1.3 billion people and a mile-long coastline, but recreational boating is not a tradition and the country lacks adequate infrastructure, limiting short-term growth opportunities.

Last week the industry was heartened by solid earnings reports from three major companies — Brunswick Corp., Marine Products Corp. and West Marine. Each reported increases in sales and profits for the spring quarter.

The Federal Reserve met to take another look at the U.S. economy. As expected, the central bank did not lift interest rates, but Fed watchers still believe the Federal Open Market Committee is likely to act at its September meeting.

“We were expecting literally nothing out of this meeting, and that's exactly what we got,” Phil Orlando, chief equity strategist and senior portfolio manager at Federated Investors, told U.S. News & World Report. "In our view, with the economy and the markets, it was premature to change policy here. We still believe when the Fed sits down in mid-September to look at the data, that will be the appropriate time."

Federal Reserve chairman Janet Yellen has said she will support a rate increase only when the data do.

"As we've said all along, we have no judgment at this point about the appropriate date to raise the federal funds rate. Our judgment on that will depend on unfolding economic developments and how they affect our forecast," she said during congressional testimony earlier this month. "It's been a long time since we've raised rates. Doing so, when we finally begin, in a deliberate and gradual way – looking at what the impact of those decisions are on the economy – strikes me as a prudent approach to take."

The past week produced more information for the Fed to digest, and the results were mixed. Two gauges of consumer confidence slipped, but the nation’s gross domestic product grew more strongly in the second quarter and revised figures showed that first-quarter GDP did not shrink, as originally reported, but managed a small gain.

On Tuesday The Conference Board said its Consumer Confidence Index fell to 90.9 in July, its lowest level since September of last year, from 99.8 in June.

"Consumers continue to assess current conditions favorably, but their short-term expectations deteriorated this month,” The Conference Board director of economic indicators Lynn Franco said in a statement.

“A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers' confidence.”

On Friday, the University of Michigan said its consumer sentiment index fell to 93.1 in July from 96.1 in the previous month. Richard Curtin, chief economist for the survey, blamed the drop on the "disappointing pace of economic growth,” but said the index has averaged 94.5 since December, the highest eight-month average since 2004.

The Commerce Department said Thursday that the nation’s gross domestic product rose at a 2.3 percent annual rate in the second quarter. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised upward to show 0.6 percent growth.

"This was a very constructive report, and given the supportive domestic economic backdrop, we expect this positive momentum in activity to be sustained in the coming months, providing the Fed with the necessary justification to raise rates this year — perhaps as early as September," Millan Mulraine, deputy chief economist at TD Securities in New York, told Reuters.

Two more employment reports will be released before the Fed holds its Sept. 16-17 meeting. The Labor Department’s Bureau of Labor Statistics will issue the July report on Friday, and economists are predicting that the economy created 215,000 jobs and the nation’s unemployment rate stayed steady, at 5.3 percent.


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