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By New_Deal_democrat August 25, 2015 8:44 am
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The China Syndrome

or, China sneezes, so the US catches ... the sniffles.

If this is going to be the Asian Century, then the globe is probably entering the first Asian-led recession.  But that doesn't necessarily mean that the US economy is going to contract.

In the first place, we have trod this path before at least twice in living memory.

First, in the 1980's we heard all about how Japan, the world's second largest economy, was going to become the global hegemon.  By 1989, the Nikkei stock average had risen all the way to 35,000.  Then it burst, and the Nikkei hasn't been anywhere close to that number since:
 

Like China now, in the 1980's Japan was a ferocious exporter to the US.  But the bursting of Japan's bubble didn't cause the US economy to roll over.

Next, in 1998 we had the Asian currency crisis.  One big difference is, only countries on the periphery, plus South Korea, were involved;
 

 

 

Neither Japan nor China particularly suffered.  In fact, this graph of the Shanghai market index shows that it barely budged in 1998.
 

But like the present, the selloff in markets followed the rotation of the earth,  Asia would crater, Europe would open. Europe would crater.  the US would open. The US cratered.  Then Asia opened, and would crater again.  Until one morning, the US opened lower in a big way, reversed itself, and closed higher.
 

China was already slowing down late last year when the price of Oil crashed, and took all other industrial commodities with it.  It certainly did have an effect on US industrial production:
 

But even with heightened layoffs in the Oil patch, initial jobless claims nationwide made all time population adjusted lows:
 

Consumer spending in the US continued on its upward trajectory:
 

Spending by US consumers remains 70% of the US economy, and the two most leading sectors of that consumer economy are houses and cars.  You simply do not get a recession in the US until home-buying and car-buying deteriorate, and then there is usually a one year lag:
 

Here is a close-up of what houses and cars are doing these past 18 months:
 

The uptrend through last month is intact.

And remember, as I have shown again and again and again, mortgage interest rates lead the housing market. Well, courtesy of the rush to safety, mortgage rates fell back below 4% last week and yesterday were at 3.9%:
 

The only thing that has been added to the mix since last fall is that the Chinese stock market bubble has burst.  While bad for the Chinese who speculated, that simply does not add any different kind of risk to the US economy that wasn't already there from the slowdown or downturn in China already evident last fall.

 

 

In summary, while industrial production and exports, along with the Oil patch, will take another hit, and job growth may suffer somewhat (but remain positive), I expect that the main fallout of the China syndrome on the US economy will be cheaper gas and cheaper mortgages.  That strikes me, on net, as a positive.

 
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