China's economy is struggling, but it might not be all that bad for the US

• China is facing a housing crisis, high youth unemployment, and declining consumer confidence.
• But the US may not be heavily hurt by the slowdown.

President Joe Biden called China's economy a "ticking time bomb," while Treasury Secretary Janet Yellen said China's slowdown could have "some spillovers to the United States."

However, William Lee, the Milken Institute's chief economist, told Insider China's economic stumble might not be all bad for the US.

His key argument is that China's plunging home sales and high youth unemployment stem from long-standing structural problems, not short-term consequences of COVID-19 lockdowns. This means that rather than riding out a cyclical downturn, some American companies are making major changes to pull out of China and move their supply chains elsewhere.

"American industries, because of the re-globalization and restructuring of global supply chains, are already pulling investments away from China toward other sources," Lee said.

In addition, companies have been looking to diversify their supply chains and reduce risk, given geopolitical tensions surrounding the Russian invasion of Ukraine and trade restrictions on China.

Other economists have agreed with Lee's view and even say China's falling prices could help slow US price inflation.

"A Chinese economic crisis might even have a small positive effect on the United States, because it would reduce demand for raw materials, especially oil, and as a result possibly reduce inflation," the economist Paul Krugman wrote in a New York Times op-ed.

The US's insulation from Chinese turmoil is partially due to a fundamental shift in the US economy toward services and away from goods as the US tries to slow inflation, which remains above the Federal Reserve's 2% target. The services index remained higher than the manufacturing index as of August, suggesting Americans were spending more on things like dining out, haircuts, and entertainment than goods themselves.

Amid rising tensions over trade, technological development, and China's relationship with Russia, US imports from China plummeted in the first half of 2023. Though China has been a leading producer in some goods such as electronics and electric vehicles, US goods imports from China — particularly in industrial equipment and consumer electronics — dropped 25% from January to June, according to the Commerce Department.

In addition, the Federal Reserve, Bank of England, and European Central Bank are raising interest rates to fight inflation, which has resulted in companies tightening their wallets and buying fewer Chinese products.

"That to me is the most important reason why it is that Chinese exports have slowed down over the last year. That and the fact that most Americans are switching from buying Pelotons to going to Europe," Lee said.

China's share of total US goods imports in the first six months have fallen progressively since peaking in 2017 as countries such as Vietnam, India, and Mexico have taken its place. Earlier this year, Mexico replaced China as the US's main trade partner as $263 billion worth of goods passed between the two countries in the first four months of 2023, according to Luis Torres, a senior business economist at the Federal Reserve Bank of Dallas.

Direct investment in China and Hong Kong, as well as US portfolio investment, which includes stocks and bonds, were just 2% of the US GDP in the second quarter, which means the US has little exposure to China's economy and thus would not be significantly affected by a continuing slowdown.

Meanwhile, Chinese imports of US goods, which may continue to slow, amounted to less than 1% of the US GDP, suggesting a reduction in Chinese imports wouldn't drastically harm the US economy.

"For foreign direct investment leaving the United States, when US investors go around the world, China is like No. 5, after the UK, Canada, and Mexico, so China has really been a destination for American capital, but it's not the biggest one," Lee said.

This switch in supply chains will likely most help American steel companies, commodity producers, and battery manufacturers, Lee said, though he added that the American semiconductor industry might struggle more. In addition, China's slowing economy has already chipped away at some American companies' revenues, including DuPont's and Danaher's.

Though China's economy has been plagued by a number of crises, including low consumer confidence, many Americans may not have to worry about the downturn hurting their wallets.