Investors are beginning to sense that the global economy may be slowing and could lead to weak economic growth, which could cut sharply into the pace of recovery. The signs were everywhere this week, including new concerns that even China's booming economy may be in retreat.
A day to digest the actions of the U.S. central bank this week led many U.S. investors to conclude the economy is slowing more than they anticipated. The Federal Reserve said Tuesday that high unemployment and tight credit markets are slowing the recovery. Then, Wednesday, the Labor Department said the number of job openings fell for the second consecutive month. The Commerce Department added that the U.S. trade deficit grew by nearly one-fifth in June, the worst showing since late 2008. The gap between what Americans sell abroad and what they buy from foreigners expanded to almost $50 billion - and that's just for the month of June.
Wall Street investors flocked to the sell window, pushing U.S. stocks down between 2.5 and 3 percent. When the smoke cleared, it became clear the news was combined with word that China's industrial output rose at its lowest rate in 11 months, and that Britain's economic recovery is weakening. All that, along with China's slowing retail sales growth and weakening growth of new loans, added to signs that China's booming economy is slowing.
Barry Bosworth, senior fellow at the private, Washington-based Brookings Institution told Bloomberg News, however, that all this is sort of a confirmation that the economies of Asia actually continue to do rather well.
"What's going on in China, I think, is right on plan," said Bosworth. "They wanted to burst this bubble. They seem to have successfully done that. The economy is slowing down, but to something like 8-9% (growth) a year, whereas the news out of Europe is much like the news out of the United States (and) has been for some time. The industrialized countries are having a lot of problems."
Bosworth says he thinks China's economy has weathered the global economic crisis quite well and may be just about back to where it was when the crisis started. But, he adds, that that's not to say China's economy does not have some important weaknesses.
"China's biggest problem is that it's too dependent on exports to the global economy and, if the global economy falters, that's going to slow down, ultimately, growth in China," said Bosworth. "China is draining too much purchasing power out of the world economy. They're not really being a good global citizen during this time of weak global demand. They will be negatively impacted by the U.S."
Bosworth adds that China needs to accelerate its efforts to increase domestic consumption so it can rely less on its exports. Doing that, he says, would help other economies.
Still, while some worry about the latest economic reports out of China that some believe point to a slowdown, it is not a view all analysts see. David Riedel is president of Riedel Research Group, which specializes in Asian economies including China, and he tells Bloomberg News that he sees two things of importance in these latest reports.
"First of all, consumer spending continues to rise nearly 18% over last year," said Riedel. "That's where the Chinese government is driving the Chinese economy, that's the number to watch. Secondly, inflation, because that's the one thing that could derail consumer spending and this growth into a consumer economy. Remember, that in China, when they calculate CPI, 34% of that basket is food prices. So, when you see food prices up 6.8 percent, dragging that inflation number above the government target of 3 percent, that's something we need to keep an eye on. But, so far, it's a slowdown, not a meltdown, and that's an important thing for investors to remember."
Riedel also says he does not believe there is a bubble waiting to burst in China. He says the government is taking the right actions to help drive down speculation in high-end residential properties and point the market toward more affordable homes that are still in great demand.