Economic Slowdown Spreading Like Wildfire in Global Economy

Activity at Chinese factories slowed the most in nine months and the U.S. Purchasing Manufacturing Managers index (PMI) fell to 47.8 in August—the lowest level since November 2011. The index is measured on a 100-point scale and readings below 50 are considered indicative of economic slowdown. (Source: Reuters, August 23, 2012.) And PMI has been below 50 for last 10 months!

The economic slowdown is widespread and not only contained in the eurozone, the U.S., or China alone. One country after another is feeling the effects of it.

Japan—the biggest trading partner with China—is witnessing an economic slowdown as well. The trade deficit in July for Japan fell more than expected, with exports falling 8.1% from a year earlier. (Source: Bloomberg, August 21, 2012.) Australia and Taiwan are also seeing exports decline with China.

The economic slowdown in China is a true example of the slowdown in the global economy. China’s exports grew by only one percent in July and factory output was at its lowest in three years! The country’s exports are falling while the central bank of China has been trying to stimulate the economy. It has cut interest rates twice since June, but the economy doesn’t seem to pick up.

Why does it all matter? The U.S. economy is highly affected by economic slowdown in the global economy, and growth in China’s economy is critical.

The eurozone’s ripple effects have reached China, Japan, Taiwan, and Australia. What does it mean? The crises are now spreading. The global economy is starting to show signs of an economic slowdown—and China’s economy acts as an indicator. (See: Prospect of Global Economic Recession Can No Longer Be Ignored.)

As I have been suspecting, the U.S. is already seeing an economic slowdown of its own. A few good numbers don’t mean that the economy is back to the growth stage. The root causes at home are still the same: unemployment; debt; and declining standard of living.

As a result of this economic slowdown in the global economy, the U.S. will witness further decrease in wealth, consumption and an escalation of current issues—a vicious cycle that seems to have no end.

Where the Market Stands; Where it’s Headed:

Only a couple of trading days left in the month and it looks like the stock market went nowhere in August. The Dow Jones Industrial Average is ending the month close to the same level it started the month. We are near the end of bear market rally in stocks that started in March of 2009. (Also see: Where the Stock Market Goes From Here.)

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in Profit Confidential, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.