Is the More Troubling Story Asia--or Boeing?

Months from now, we may look back on last week’s market turmoil and realize that the most important news event . . . had absolutely nothing to do with Hong Kong.

Rather, it may turn out that the much bigger bomb was dropped by Boeing Co., which stunned Wall Street last Wednesday by announcing that it expects to take up to $2.6 billion in write-offs against earnings because it can’t fill plane orders on time.

Unintentional though it may be, Boeing is making Federal Reserve Board Chairman Alan Greenspan’s worst nightmares come true. The Fed chief has warned repeatedly that he fears the consequences of continuing brisk U.S. economic growth in what has become the tightest labor market in decades.

Boeing conceded that it simply can’t train workers fast enough to keep up with demand. Parts shortages also are hampering production, which may be a telling sign that the aerospace industry cutbacks of the early 1990s went way too far.

Is Boeing’s problem unique? In terms of scale, perhaps. But there is no dearth of anecdotes from companies around the country complaining about the difficulty they face in filling jobs--or at least filling them with people who are even remotely qualified (and thus likely to be productive, rather than the equivalent of sand in the gears).

This has been Greenspan’s primary focus. He doesn’t want to see companies paying extraordinary increases in wages to get workers--or to see product prices rising significantly to pay for those hard-to-find workers. In other words, Greenspan doesn’t want another inflation spiral starting on his watch.

Of course, many economists think Greenspan is living in the Dark Ages. The U.S. economy has grown at an estimated 4% real rate over the last year, a fast pace historically. Yet consumer price inflation has sharply decelerated in that period, not accelerated, and by one key measure is running at the lowest pace since 1965: 2.2%.

“Inflation pressures are still not here,” concedes Raymond Worseck, economist at brokerage A.G. Edwards in St. Louis.

But the man with his hands on the money controls adamantly believes that his job is to be preemptive, to anticipate inflation, then keep it at bay by tightening credit and slowing the economy through curbed demand for goods and services.

These were Greenspan’s words just 2 1/2 weeks ago: “To believe that wage pressures will not intensify as the group of people who are not working, but who would like to, rapidly diminishes, strains credibility. The law of supply and demand has not been repealed. If labor demand continues to outpace sustainable increases in supply, the question is surely when, not whether, labor costs will escalate more rapidly.”

That was Greenspan at his most hawkish, and it suggested to some economists that without significant signs of an economic slowdown between then and Nov. 12--when the Fed next meets--there is a reasonable chance that the central bank could vote to boost short-term interest rates.

And if the high-flying stock market has a problem with that, tough! Greenspan is probably sick of having his warnings about speculative market activity all but ignored anyway.

*

Yet suddenly, the Fed’s policy deliberations may have been badly muddied by events a continent away.

The Hong Kong stock market’s dive last week, which shook financial markets worldwide, raised the possibility of much greater economic chaos in Asia ahead. It’s one thing for currency values and stock prices to have collapsed in places like Malaysia and the Philippines, minor players on the world stage. It’s quite another for panic selling to grip the self-anointed market gateway to China’s 1.2 billion people and capital-hungry economy.

What’s more, poor Japan--already struggling with a sharply weakened economy in recent months--now faces the likelihood of adding even more bad loans to its Mt. Everest-size pile of questionable bank debt, courtesy of its beleaguered Southeast Asian borrowers and, perhaps next, its Hong Kong borrowers.

Just how much the Asian economy overall will slow in 1998 no one yet knows. Nor is it easy to quantify the effect of an Asian slowdown on the U.S. economy. For now, however, most economists believe the impact will be limited. True, Asia buys 35% of our total exports, but that includes Japan and still-booming China. The hardest-hit Southeast Asian countries, the ones whose purchasing power has been most reduced in the ongoing crisis, account for relatively little of U.S. export demand.

But this global economy is all about linkages--who knows, for example, how much European demand for our exports may be slowed because Asian demand for European exports weakens?

At the Fed, the discussion now will have to include two possibilities: First, that the global economy might slow markedly, rather than accelerate, in 1998, thanks to Asia. A “preemptive” Fed thus might have to consider whether the true preemptive move would be to maintain easier credit, to assure the U.S. economy doesn’t slow too much next year.

Second, the Fed will have to mull the idea that Asia’s mess will be significantly deflationary for the world economy, by cutting prices of Asian exports (perhaps including China’s, which must stay competitive with its currency-devaluing neighbors) and forcing competitors worldwide to follow the same course.

Deflation can be a good thing, if contained. But if it runs rampant because the supply of goods suddenly far exceeds demand, it can be ruinous for corporate earnings and, ultimately, stock prices.

Two very different markets rang the deflation bell last week: Japan’s bond market, where investors were willing to accept a record-low yield of 1.67% on 10-year government bonds, rather than put their money in, say, Japanese stocks. And the gold market, where bullion prices fell to a 12-year low of $307 an ounce by Friday, ostensibly reacting to the possibility of heavy Swiss government gold sales. But that decline also smelled of deflationary expectations.

*

Could Asian bears, Japanese bond buyers and gold short-sellers all have it wrong? Is Boeing the more accurate harbinger of what’s to come--meaning stronger world economic growth than what central bankers believe is sustainable without sparking inflation?

For now, it’s hard to tell what the sinking U.S. stock market is more afraid of--the prospect of weaker corporate profits if global growth slows too much, or higher U.S. interest rates if it doesn’t.

Maybe, with the Dow Jones industrial average now at 7,715.41 and off 6.6% from its August peak, the market is just in one of its periodic afraid-of-everything moods.

But if history is still a good guide, the stock market would be far happier with weaker growth and lower interest rates ahead than stronger growth and higher rates.

Tom Petruno can be reached at tom.petruno@latimes.com