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The U.S. Economy, China and the Stock Market

Uploaded: Aug 29, 2015
The U.S. economy posted continuing modest economic indicators in August including a sharp upward revision to second quarter GDP, a good housing report, rising consumer confidence and a strong durable goods orders report along with continuing low unemployment claims and a good July jobs report.

All of these indicators were recorded before the sharp worldwide and U.S. stock market decline that started after a sharp selloff in the Chinese stock market and other worldwide equity markets.

I am not a stock market expert but here are some thoughts. The Chinese stock market selloff could be connected to concerns about a slowing economy there. The Chinese devaluation of the yuan adds credibility to this hypothesis. And perhaps investors thought Chinese stocks were too richly valued.

In the U.S. prior to the Chinese events, there was no indication of a slowing economy. The debate was when the Federal Reserve Bank would raise short term interest rates. Of course, here as well investors may have thought that stock valuations were high.

What might these trends mean for the national, state and regional economy?

There are no obvious short term positives here. The question is how serious might the negatives be. The slowing Chinese economy and the devaluation will make American goods slightly less competitive in comparison to Chinese goods and will make activities like tourism more expensive for Chinese visitors. These moves by themselves are not likely to substantially affect the pace of U,S, economic growth.

A more serious outcome occurs if the Chinese slowdown leads to slowing growth worldwide as the financial crisis in 2007 did.

For California the impacts are likely to be negative and modest. While China is our third largest export market, the total value of exports to China is less than 1% of our economic output. Currently foreign tourism is setting records in visitors,, flights and hotel bookings and a small increase in the cost to Chinese visitors is unlikely to have much impact.

There will probably be at least a short term decline in capital gains revenues from the stock market decline if it persists. This will come in the context of revenues that have been rising faster than forecast for several months as a result of strong job growth. Other revenues will slow if these events do cause more than a small temporary slowdown in state growth.

Silicon Valley is a more complicated case because the stock market selloff in technology shares is an additional factor here. There may be postponement of IPOs and new technology investments until the stock market outlook is clarified. Sales to China of technology products are unlikely to be slowed much by the small devaluation and may eventually be aided if these moves boost Chinese consumer spending.

And as reported in the last blog, right now the San Jose metro area is plus 60,000 jobs (6%) for the past 12 months as well as posting the second highest VC funding since the dot.com boom.

So for now it is a "stay tuned" situation to see how the next couple of months go in world economies and stock markets, which sometimes are and sometimes not connected much.

Comments

 +   1 person likes this
Posted by real estate, a resident of Barron Park,
on Aug 31, 2015 at 1:26 pm

In your opinion, would these changes make Palo Alto real estate an even more attractive investment option for Chinese investors? OTOH would the falling yuan make buying properties in Palo Alto more difficult?


 +  Like this comment
Posted by answers, a resident of Woodside: Family Farm/Hidden Valley,
on Aug 31, 2015 at 7:11 pm

@realestate: Yes.


 +  Like this comment
Posted by Citizen 7, a resident of Another Palo Alto neighborhood,
on Aug 31, 2015 at 11:54 pm

More than a decade of "quantitative easing" has created a tulip-mania in just about everything; classic cars, art, real-estate, equities...


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Sep 1, 2015 at 10:55 am

stephen levy is a registered user.

I am not a real estate expert but it is hard to see how a 2 or 3% change in exchange rates will affect much in the Bay Area real estate market for new residents no matter where they come from.


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Sep 1, 2015 at 11:03 am

stephen levy is a registered user.

@ citizen 7

I do not see an excess of tulips in the Bay Area.

But as today's BLS report indicates I do see a lot of job growth and reduced unemployment that is helping people.

[Web Link BLS report]

Highlights include

--the largest 12 month % job increase among large metro areas was the San Jose metro area (+6.2%)

--the lowest unemployment rate among the nation's 38 metropolitan divisions was 3.7% in the SF metro division

I do not think we will know for a while how long the recent U.S. economic strength will continue but it is important to distinguish the real economy from movements in asset prices.


 +  Like this comment
Posted by Alan, a resident of Menlo Park: Belle Haven,
on Sep 1, 2015 at 11:40 am

Alan is a registered user.

I heard a radio program about the impact ... a 2% drop in the exchange rate does make property slightly more expensive for Chinese ... but if they expect much more dramatic changes in this future, it could spook them into dumping even more money in the US real estate market.


 +  Like this comment
Posted by resident, a resident of Another Palo Alto neighborhood,
on Sep 1, 2015 at 12:21 pm

The Palo Alto-SF economy at the margin which is producing all the wealth has everything to do with international markets and monetary conditions since it controls the flow of money to high tech start-ups and real estate.
So there is underlying risk in this situation the extent of which cannot
be fully known as events play out. The second risk is the drought which
also cannot be known notwithstanding strong El Nino forecasts at this
time. Citizen 7 has the correct perspective on this. The risk is growing
not only for a cooling off but a possible bust after this long run-up.


 +  Like this comment
Posted by chris, a resident of University South,
on Sep 4, 2015 at 2:52 pm

The key to the Chinese impact on Palo Alto real estate is the extent to which the slowdown / recession there slows down the wealth creation process. If it is only a blip, it will not have much effect. If there is a deep, prolonged slowdown, then the Chinese will not have the new wealth to sustain the current level of purchasing.


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Sep 4, 2015 at 3:06 pm

stephen levy is a registered user.

Well Chris, that is one perspective and I agree no impact if a blip.

Another perspective is that the purchase by foreign born residents is tied to the job creation here in Silicon Valley and to US immigration policies since most foreign born residents come to Silicon Valley for the jobs.


 +  Like this comment
Posted by Crescent Park Dad, a resident of Crescent Park,
on Sep 8, 2015 at 10:39 am

Alternately - foreign/Asian investment in PA residential real estate has perhaps more to do with a more promising offshore alternative than to keep the money at home. As everyone knows that PA residential real estate has always been a very good long term investment.



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