Chinese Slowdown Means More Worries for U.S. Economy

The world's second-largest economy is decelerating, meaning trouble in many other countries.

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The Chinese government reported its lowest quarterly GDP growth in three years, with second-quarter GDP growth at an annual rate of 7.6 percent. Even while the U.S. feels the economic headwinds from the European crisis across the Atlantic, this slowdown creates yet another weight on the American economy from the other side of the world.

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It's not that China is a major consumer of U.S. goods; though U.S. exports to China have grown more than six-fold since 2000, shipments to China still only account for around 7 percent of total U.S. exports. Rather, China's consumption of goods like raw materials from around the world promotes growth in the global economy. When that consumption slows, the effects can easily find their way back to U.S. shores.

"There is a knock-on effect that will affect places like Korea, Latin America, and Brazil. To the extent that a China slowdown causes a slowdown in those economies, that knock-on effect is going to be felt throughout the global economy, which is already soft," says Robert Sicina, a professor in the department of international business at American University's Kogod School of Business.

In particular, when all of those affected countries suddenly find it harder to buy U.S. goods, it will help to drag down an already-anemic recovery.

"In the U.S. economy, where we need every tenth or two tenths or three tenths a percentage point of growth, [a Chinese slowdown] makes it difficult to move from this sluggish expansion to a more normal or even robust expansion," says Joel Naroff, president and chief economist of Naroff Economic Advisors, an economic consulting firm based in Holland, Pa.

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In the U.S., where first-quarter GDP growth was most recently estimated at 1.9 percent, 7.6 percent sounds like a fantastic pace. However, China is an emerging economy, with plenty of capacity for new growth.

"In some respects, it's easier for China to grow. It's leveraging a highly competitive factor of production in global markets, which is a cheap labor force," says Sicina.

Indeed, the latest GDP figure is a marked slowdown from the 9.5 percent growth seen a year ago.

The deceleration is due in part to a decline in demand for Chinese goods in other troubled global economies. Chinese leaders have advocated a broader economic shift away from reliance on exports and toward more domestic consumption, in order to promote more economic stability.

Still, the 7.6 percent growth rate comes in just above the Chinese government's 7.5 percent 2012 target for economic growth, which the country slashed from 8 percent in March. Its officials are defending the latest GDP figure as a sign of a strong economy.

"Even though the economy continued to decline, I think that compared to other countries it isn't bad," Sheng Laiyun of China's National Bureau of Statistics told reporters, as reported by the New York Times. "The economy remains steady."

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The figures may spell trouble for the global economy, but some people question the reliability of economic data from the authoritarian state. In Naroff's opinion, while the GDP figures may not tell an entirely accurate story about the country's growth, they at least get the direction of that growth right.

"My personal belief is that the slowdown is probably greater than they're reporting," says Naroff.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.