China’s recent COVID lockdown has led to a slowdown in manufacturing growth.
It is a bad omen for American production, which is closely linked to China on a lame basis.
Still, the United States is likely to outperform China thanks to its slate business and dependence on other industries.
China’s latest COVID lockdown has produced a domino effect that could spill over to the US economy next time.
This is because China sees a large decline in production as a nation closes the store. The fate of American manufacturing is inextricably linked to China, the former of which is typically three months behind the latter, according to Pantheon Economics, a macroeconomic research firm.
The chart below shows how closely production activity in the two nations has been linked over the last many years. The light blue dive line does not suggest bright times ahead for the United States.
In fact, the Institute for Supply Management (ISM) index – a monthly measure of the U.S. economy based on a survey of purchasing managers at more than 300 manufacturing companies – has already slowed down over the past few months. It fell for the second month in a row in April to 55.4, marking its fifth decline in the last six periods.
“It is hard to imagine that American production as a whole can be strengthened against such a difficult background from China,” the Pantheon researchers wrote. “The prospects for manufacturing are waning, thanks to the chaos triggered by China’s zero-COVID policy.”
A slowdown in the manufacturing industry risks spilling over into adjacent industries and affects parts of the United States where factories employ large sections of the population.
Meanwhile, in China, the country’s most important manufacturing index fell further below 50 in April, marking another straight contraction. The 50 level is considered the threshold for whether production grows or shrinks.
It is second month in a row, China’s manufacturing and non-manufacturing index fell simultaneously. Before March was the last time, both fell under this brand, February 2020, when China first worked to stop the spread of coronavirus.
A slowdown in production does not mean doom for the US recovery
Despite its bearishness in manufacturing, the Pantheon notes that it only accounts for approx. 11% of U.S. Gross Domestic Product (GDP), compared to 26% in China. The U.S. manufacturing sector has actually slipped into recession – typically defined as at least two consecutive quarters of contraction – on several occasions over the past decade, while overall GDP has remained strong.
The Pantheon also points out that the US shale industry – which has a major influence on the ISM manufacturing measurements – has been strong and will continue to perform better than oil prices continue to rise.
Only a few components of the central consumer price index are “very sensitive” to developments in China, the researchers wrote, including: clothing, household electronics, appliances and furniture.
“The domestic labor market and the state of the vehicle market mean much more,” the Pantheon concluded.
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