China overall impact on U.S. Economic growth

World Economic outlook - China overall impact on U.S. Economic growth : U.S. stocks declined broadly on Tuesday as China's devaluation of its yuan currency hit companies with a big exposure to the world's No. 2 economy and added to worries about the global economic outlook.

 The yield on benchmark 10-year Treasuries fell more than 5 percent in U.S. trading today, moving down to 2.12 percent in early afternoon. So the most immediate practical impact of China's move in the U.S. may be that mortgage rates stay lower for longer.

The idea is that the Federal Reserve may stand pat because weaker growth in one of the U.S. major trading partners might help convince the Fed that conditions are still soft enough to keep the Fed funds rate at the near-zero level it has occupied since 2008. Whether that's enough to offset strengthening domestic labor markets, which are expected to prompt the Fed to raise rates in either September or December, remains to be seen.

The move today isn't big enough to offset the yuan's appreciation over the last year, so it's not likely that it will immediately affect China's growth rate by itself, Goldman Sachs analyst MK Tang said in a note to clients. Because the People's Bank of China's policy shift changes the government's formula for valuing the currency to give greater weight to market prices in a system that is a hybrid of state and market control, it's too soon to tell whether the 2 percent drop will be all that's in the pipeline, Tang explained. But even a 5 percent drop wouldn't meaningfully affect China's exports, Morgan Stanley's Helen Qiao said in a March 6 report.

If China's growth did slow more sharply, the impact on the U.S. would be minor. Goldman Sachs analyst David Kostin says a 1 percentage point drop in China's annual economic growth would shave 0.06 percent off U.S. gross domestic product. That impact is already showing up in second-quarter reports by companies such as Caterpillar, 3M and United Technologies, suggesting it would be concentrated among industrial companies.

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