Why China's latest COVID lockdown could threaten US manufacturing recovery

05-05-2022

The extreme measures taken by China to reach COVID-Zero could create a domino effect that may topple onto the US economy next, according to global experts.

As the lockdowns in the major manufacturing hubs continue, output has slowed. Pantheon Economics, a macroeconomic research firm, has explained that the fate of US manufacturing is inextricably linked to China's, the former of which is typically three months behind the latter. 

The US Institute for Supply Management (ISM) index, a monthly metric of the US economy based on a survey of purchasing managers at more than 300 manufacturing firms, has already been slowing down over the past few months. It fell for a second straight month in April, to 55.4, marking its fifth decline in the last six periods

"It's hard to imagine that US manufacturing overall can strengthen against such a difficult backdrop from China," the Pantheon researchers noted. "The prospects for manufacturing are dimming, thanks to the chaos triggered by China's zero-COVID policy."

A slowdown in the manufacturing industry risks rippling into adjacent industries and impacting parts of the US where factories employ large portions of the population.

Meanwhile, in China, the nation's main manufacturing index fell further below 50 in April, marking a second straight contraction. The 50 level is considered the threshold for whether manufacturing is growing or shrinking.

It's the second month in a row China's manufacturing and non-manufacturing indices dropped simultaneously. Before March, the last time both dipped below that mark together was February 2020, when China first worked to stop the spread of the coronavirus.

But it's not doom for the US recovery
Despite its bearishness on manufacturing, Pantheon notes that it only accounts for roughly 11 percent of US gross domestic product (GDP), compared to 26 percent in China. The US manufacturing sector has actually slipped into recession — typically defined as at least two consecutive quarters of contraction — on multiple occasions over the past decade, while headline GDP has stayed strong.

Pantheon also pointed out that the US shale industry,which has a big impact on ISM manufacturing readings, has been strong and will continue to outperform as oil prices keep rising.

Only a few components of the core Consumer Price Index are "very sensitive" to developments in China, the researchers wrote, including: clothing, household electronics, appliances, and furniture.

"The domestic labour market and the state of the vehicle market matter much more," Pantheon concluded.

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