The stock market is not the economy. That’s a simple financial truth, but it’s hard to keep in mind in the midst of a sell-off like the one we saw last Monday, especially with headlines screaming about a “Bloodbath in Global Markets.” So, even as the market rallied last week, concerns lingered over the possibility that the sharp decline in stock prices boded ill for the U.S. economy as a whole, giving us front-page stories fretting about the “real threat to the American economy” and warning of “a leaner era ahead.” These worries are almost certainly unfounded. The market sell-off in the U.S. wasn’t just a matter of panic—it reflected investors’ genuine anxieties about the future. But those anxieties have surprisingly little to do with the current state of the American economy.
The sell-off was driven mainly by the turmoil in China, which is dealing with the precipitous deflation of a stock-market bubble and is struggling to maintain its economic growth. This has led many to believe that China will grow more slowly than anticipated, while Chinese leaders’ sometimes ham-fisted policy moves in recent months have raised questions about their ability to manage the economy. Given how much we hear about China’s economic importance, you might think that these problems would have a big impact on the U.S. They won’t. In fact, total U.S. exports to China are just a hundred and sixty-five billion dollars, less than one per cent of G.D.P. There are certainly firms—including commodity producers, microchip makers, and fast-food companies—for which China is a huge market today. But for most firms the prospect of selling billions of products to Chinese consumers remains more of a promise than a reality. Goldman Sachs, for instance, estimates that just two per cent of the S. & P. 500’s revenues come from sales to China.
So, while a significant economic downturn in China would squeeze Apple, Yum! Brands (e.g., Pizza Hut), and Iowa farmers, most Americans, and most American companies, would barely notice it, at least in the short term. (Goldman Sachs estimates that a one-per-cent drop in China’s growth rate translates into a mere 0.06-per-cent drop in the United States’s G.D.P.) And the flow of goods we import from China is unlikely to be affected by the downturn at all.
Globally, China’s slowing pace of growth has certainly had spillover effects. In the past decade, its boom has created a voracious appetite for commodities of all kinds, from iron ore and copper to oil. As growth there has slowed, the price of these commodities has fallen, and the price of oil has been pushed down further by a production glut. This has been bad for energy and mining stocks, and it’s been very hard on developing economies, like those in Latin America, which relied on commodity exports to China. But for the U.S. economy cheaper commodities are a good thing, putting more money in consumers’ pockets and lowering production costs for American firms.
Some pundits worry that all this market turmoil could presage something like the meltdown of 2007-09 or the Asian financial crisis of 1997-98. Yet those were ultimately severe insolvency crises, involving enormous piles of debt that were not going to be repaid, companies and countries going bust, and economies that were deep in recession. The situation today isn’t analogous. Unlike the Asian countries that got in trouble in the late nineteen-nineties, China is a creditor to the rest of the world, not a debtor. It has plenty of debt troubles—thanks to enormous overborrowing by corporations and local governments—but those are largely internal issues, unlikely to go global. As for the struggling emerging-market economies, they, too, are in much better shape than they were in the late nineties. Nowadays, these countries typically have sizable dollar reserves and, instead of running big current-account deficits, are mostly running surpluses with the rest of the world. So the ingredients for a full-blown financial crisis don’t seem to be in place.
This doesn’t mean that the stock-market correction was irrational. It reflected concerns about the long-term future, particularly when it comes to China. China isn’t hugely important to U.S. companies or exporters today. But the expectation has been that it will become so, before long. Now investors are wondering if the scenario of a billion consumers happily carrying iPhones will take a lot longer to arrive. And there are similar concerns about emerging markets in general. As the level of uncertainty among investors rises, their tolerance for risk falls, which means they’ll pay less for risky assets, and so stock prices go down.
To say that the stock market isn’t the economy doesn’t mean that stock-market crises can’t become contagious; they can dampen what Keynes called the “animal spirits” of managers and consumers, leading them to cut back on investment and spending. Stock prices do have some impact on consumer spending (the richer consumers feel, the more willing they are to spend). Still, market moves need to be severe and long-lasting to make a real difference. The 1987 crash, for instance, saw stocks drop more than twenty-two per cent in a single day. Yet it had no measurable impact on corporate investment, and only a short-lived effect on consumer spending. Americans’ 401(k)s are a bit lighter than they were two weeks ago. America’s economy looks pretty much the same. ♦
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