China Wind Chills U.S. Earnings

China’s slowdown is showing up in U.S. companies’ earnings, and the worst may be yet to come.

By Justin Lahart

July 22, 2015 3:46 p.m. ET
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A China Shipping Container Lines Co. ship is seen near the Port of Los Angeles. The Chinese slowdown is beginning to take a toll on U.S. companies.  A China Shipping Container Lines Co. ship is seen near the Port of Los Angeles. The Chinese slowdown is beginning to take a toll on U.S. companies. Photo: Patrick T. Fallon/Bloomberg


Don’t think the Chinese economy is doing as well as Chinese government statistics say it is? A lot of companies seem to agree.

When China reported last week that second-quarter gross domestic product was up by 7% from a year earlier—steady with the first quarter and better than the 6.8% economists anticipated—it raised more eyebrows than glasses. The GDP figure was conveniently in line with the government’s target for the year, yet the fiscal and monetary support Beijing has been ladling on the economy and stock market suggested growth was hardly on track.

Indeed, results this week from companies doing business in China suggest the environment softened rather than stabilized in the second quarter. Meanwhile, other companies are struggling with an influx of Chinese goods in their markets that are pushing down prices.

The risk is that amid high indebtedness, declining property values and an unsettled stock market, China’s government will struggle to continue propping up growth. That could further weigh on corporate results for scores of U.S. companies in the quarters to come.



For the many companies that have built out their Chinese operations over the past several years, things are tough enough already. On Wednesday, Whirlpool WHR -0.31 % reported that demand in the country was down 3%, while Illinois Tool Works said revenue fell by 2%.
On Tuesday, United Technologies said that orders for its Otis elevators were down 10% in China from a year earlier, and saw a sharp drop in heating, ventilation and air conditioning orders, too. And on Monday, International Business Machines reported that revenue in China was down by 25%.

Trade activity underscores the depth of the slowdown. According to the Commerce Department, the value of U.S. exports to China was 6.1% lower this year through May than the first five months of last year. That weakness appears to have extended into June, with the ports of Long Beach and Los Angeles reporting a 9.7% drop in loaded outgoing containers versus a year earlier.

Not all companies are suffering. In an otherwise disappointing report Tuesday, Apple said sales in China were strong. But even among technology companies, it seems more the exception than the rule. Microsoft on Tuesday said that macroeconomic conditions in China were challenging, while software maker VMware said that for the first time it had seen a significant slowdown in its China business.

The silver lining in the Chinese cloud is that while the impact may be notable at individual companies, the effect should be muted on the overall U.S. economy. Goldman Sachs economists note that exports to China account for only about 1% of U.S. GDP—most of what large, U.S.-based multinationals sell in China they make in China. Financial linkages are also limited.

The downward pressure that China is putting on commodity prices could also turn out to be a boon for many U.S. consumers. The same can’t be said for many companies, though.

A weaker Chinese economy is helping depress prices for commodities like crude oil and copper, hurting producers. A step up the supply chain, many companies are dealing with a glut of China-made goods that China can no longer absorb.

Discussing steel and specialty-metal maker Allegheny Technologies’ second-quarter loss Tuesday, Chief Executive Rich Harshman said that a “surge of low-price imports of standard stainless products from China created significant pressure on base selling prices.”

Such pressure looks to be extending to many other industries. Last week, the Labor Department reported that the overall price of imports to the U.S. from China was down 1.2% from a year earlier. That is part of why inflation remains so low, and why the Federal Reserve, when it starts raising rates, is likely to do so only slowly.

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