Assuming that China’s economic slowdown continues as a “soft landing,” the impact on the U.S. economy will be relatively minimal, according to Goldman Sachs. The August 7th edition of GS’s US Weekly Kickstart highlights the ongoing financial market turmoil in China, and assesses the effect it is likely to have on the overall U.S. economy and several individual sectors.
Unraveling the China conundrum
According to David J. Kostin and the Goldman Sachs team, a growing number of clients they talk to say that the “dramatic weakening in China economic growth” is why they believe that the Fed may not tighten in the fall of this year, and may even delay the initial rate hike until the first quarter of 2016.
Also of note, it clear that “China’s equity market rollercoaster has clouded the global economic growth outlook.” The GS analysts point out that in the first four months of 2015, the MSCI China Index skyrocketed a scintillating 29% (compared to just 2% for the S&P 500), but has nosedived by 23% since then. The year to date return for the benchmark index is -1% versus +1% for S&P 500.
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The GS analysts also point out that the overall impact of the China slowdown on the American economy is rather small. Recent Chinese economic data including the Markit PMI, new orders, and factory output, were all under estimates. That said, the GS U.S. economics research team estimates that a 1% drop in China’s GDP growth would only cause a 0.06% decline in U.S. GDP growth.
Around $168 billion of S&P 500 firms' revenue comes from China, which is only around 2% of total sales. Total non-U..S sales represent 33% of aggregate S&P 500 revenue, with Asia-Pacific representing about 8%. It is likely that sales from China may be slightly understated as all firms do not report specific China-based sales, but combine them into one number for the Asia-Pacific area.
Of note, IT stocks are the most exposed to China, with a solid 10% of revenues produced in the country (and growing rapidly). Total sales to China represent under 2% of revenues in the Industrials and Consumer sectors.
However, even given the quite small China revenue exposure of S&P 500 firms, American stocks with significant sales exposure to China suffered a large spillover effect from recent the sell off in Chinese equities. The GS analysts note that that their sector-neutral basket of 50 Russell 1000 firms with high sales to BRIC countries (GSTHBRIC) has fallen behind the S&P 500 by 520 basis points since the beginning of June.