It’s the New Year’s hangover that never ends. Granted we are only about a week into the New Year, but so far it’s been a doozy. China’s Shanghai stock market plunged 7.0 percent twice this week after tripping new circuit breakers designed to staunch market panic, igniting a global stock market sell-off that erased some $3 trillion off of global equity market capitalization.
China’s stock markets did recover a bit on Friday after the new circuit breakers were suspended. Unfortunately, it wasn’t a technical adjustment in China’s stock market rules that triggered the selloff, but another round of troubling economic data out of the Middle Kingdom.
Besides pulling out all the stops to try and stabilize its stock market, China is also accelerating the devaluation of the Yuan or Renminbi against the U.S. dollar. China’s currency devaluations are clearly an attempt to make China’s manufacturing sector more competitive and China’s exports more attractive in global markets. But such medicine doesn’t work overnight, and there could still be plenty of ugly Chinese economic data ahead.
Perhaps more troubling is the chilling effect this can have of the U.S. economic outlook. This game of competitive currency devaluation tends to be a zero-sum game. China’s gain from increased exports probably translates to lost sales for U.S. manufacturers. Already the trade weighted dollar’s extensive appreciation appears to be suffocating the U.S. manufacturing expansion. The December U.S. ISM manufacturing index plunged to 48.2, the worst reading of the expansion and well into contraction territory. You add in disappointing December auto sales, construction activity, and pending home sales and you have yourself an ugly month much closer to home.
In response, we have cut our U.S. forecast for Q4 2015 Real GDP growth to 1.3% from 2.1% previously, and have scaled-back our expectations for the U.S. economy for the first half of 2016 to just over 2.0 percent growth. Even so, we will need to see a bounce in a number of economic measures in January to get there, especially consumer spending. If U.S. consumers get spooked by the economic and financial uncertainty and stop spending or companies start putting their hiring plans on hold, our 2.0 percent forecast may still be too aggressive.
To learn more, check out this week’s US Outlook Report.Tags: economy, market, spending