The Chinese Purchasing Managers’ Index (PMI) fell to 50.6 in April, compared to 50.9 in March. (Source: Fung Business Intelligence Centre, April 30, 2013.) While it’s not a big decline, it’s important to note that any number below 50 represents contraction in the manufacturing sector of the Chinese economy. In April, output, new orders, new export orders, backlog orders, and stocks of finished goods in the manufacturing sector of the Chinese economy were all lower than the previous month’s.

The obvious fear is that the economic slowdown in the Chinese economy will eventually send ripple effects through the U.S. economy, as a significant number of U.S.-based companies operate in the Chinese economy.

Unfortunately, the economic slowdown in the Chinese economy is picking up speed.

YUM! Brands, Inc. (NYSE/YUM), the parent company of many fast food eateries, including Pizza Hut, Taco Bell, and Kentucky Fried Chicken (KFC), reported its profits plummeted 27% in the first quarter of 2013 compared to the same quarter of last year. One of the main reasons for the decline in the company’s profits was a significant decline in sales in the Chinese economy. (Source: MarketWatch, April 23, 2013.)

YUM! Brands is not the only company that operates in the Chinese economy. Wal-Mart Stores, Inc. (NYSE/WMT), the biggest retailer in the U.S. economy, has more than 380 stores in the Chinese economy. (Source: Wall Street Journal, April 1, 2013.)

Not only will the economic slowdown in the Chinese economy decrease the profits of U.S.-based companies, it will also drag their share prices lower. And I’m worried these companies will be forced to take measures to maintain their corporate earnings—cost-cutting in the form of staff reductions, which add more pressure to the U.S. economy.

I’m watching the economic slowdown in the Chinese economy closely, as I believe its implications are vast. Keep in mind that as the world’s second-biggest economy, the direction of the Chinese economy is a key indicator of the global economy.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in Profit Confidential, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.