U.S. impact of Chinese economic slowdown has increased, says Dallas Fed Economic Letter

For immediate release: May 12, 2016

China’s impact on the U.S. economy has increased over the last two decades, according to the Federal Reserve Bank of Dallas’ latest Economic Letter. As a result, the U.S. is more likely to feel the effect of a negative shock to Chinese output.

In “Impact of Chinese Slowdown on the U.S. No Longer Negligible,” Alexander Chudik and Arthur Hinojosa show how the relationship between the two countries has changed and examine the potential effect of slowing growth in China’s economic output.

“… At the turn of the century, slower growth in China would have had a small effect on the U.S.,” the authors write. “Today, reducing Chinese output growth by 1 percentage point shaves about 0.2 percentage points from U.S. output growth.”

While the Chinese economy continues to expand at an impressive clip, the pace of growth has slowed since 2010, and that trend is expected to continue. Given the size of China’s economy—it accounted for about 40 percent of global growth in 2015—a negative shock to Chinese output would affect the U.S. and other world economies both directly and indirectly.

“Regardless of the direct trade exposure of the U.S. economy to China, a Chinese slowdown negatively affects U.S. foreign trade partners, which will eventually spill over to lower U.S. output growth,” the authors write. “Such indirect (or “third country”) effects can be rather important in a globalized world.”

Chudik is a senior research economist and Hinojosa is a research assistant at the Dallas Fed.

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