Ripples From Asia Slump Could Hit U.S. Like Tsunami
The political vacuum in Japan after the resignation of its prime minister Monday has heightened worries that the United States, which so far has mainly benefited from Asia’s economic woes, might start feeling their sting more harshly than previously expected.
Until now, Americans have largely escaped serious harm from the Asian crisis. If anything, Asia’s economic problems have created an embarrassment of riches on this side of the Pacific.
The recession in Asia has helped push world oil prices down sharply. Interest rates here have remained low as investors seeking a haven have poured their money into the U.S. The dollar’s value has gone up, driving import prices down and helping to keep inflation in check.
But more recently, the dark side has begun to show. Some U.S. firms--particularly in capital goods, aircraft and electronics--have seen export orders from Asia fall off. Asian products are becoming more competitive here. The U.S. manufacturing sector is weakening.
Now, with Japan likely to remain paralyzed until a new government takes hold, the central question is: How much worse will the effect on the U.S. economy be if Japan does not act quickly to repair its fractured banking system and pull itself out of its worsening slump?
David A. Wyss, chief economist for Standard & Poor’s DRI, says the possible outcomes range from “the Disney version"--that the regionwide recession in Asia is short and the impact on the U.S. economy is on balance a net plus--to an eventual recession here at home.
Allen Sinai, president of Primark Decision Economics, cautions that if the Asian slump continues much longer, its ripples across the Pacific could become destructive waves.
Helping to shelter the U.S. economy is its self-sufficiency. America sells abroad only 12% of its economic output--far less than almost any other industrial country--and U.S. sales to Asia represent only a quarter of that amount.
It is domestic consumers who are driving the U.S. economic boom these days. Consumer spending has remained strong despite a weakness in manufacturing--about 80% of the U.S. work force is in the service sector--and substantial momentum persists, the indicators show.
The situation in Asia is already worse than economists had predicted. The once-vibrant Asian economies are mired in their most serious slumps in a generation. The nations’ currencies have been debased, and their unemployment rates are soaring toward politically dangerous levels.
Indonesia, by far the hardest hit, is in a full-scale depression. Its economy has already contracted by 20%, and its jobless rate is expected to reach 30% by year’s end. Officials predict that half the population will be below the poverty line by then, up from 11% in mid-1997.
South Korea, Thailand, Hong Kong and Malaysia, which had been on a 30-year growth tear, are all in recession. Taiwan and Singapore, once thought immune from the slump, are in jeopardy. The outlook for China is increasingly grim.
Because the financial systems in many other Asian countries have essentially collapsed, there is no easy way for them to bounce back. While plummeting currency values have made Asian exports more competitive, many firms cannot get the capital to expand production.
More ominous still, Japan--the economic engine that policymakers had hoped might help pull other Asian countries out of the morass--is itself in a recession after seven years of stagnation.
Even before last weekend’s election, Japan appeared to be paralyzed politically, unable to climb back out on its own. Now, with Prime Minister Ryutaro Hashimoto having resigned and no one in sight to take his place, the outlook seems even more uncertain.
As a result, while many analysts believe that the Asian contraction will run its course by the end of this year, few are willing to predict when Asia will start growing again.
“Right now, I don’t see recovery coming any time soon,” said Gregory B. Fager, Asia expert at the Institute of International Finance, an organization of commercial banks that tracks the situation closely. “The slump there could continue for several years.”
The drop in oil prices and continuing low interest rates have not been the only benefits that Americans have reaped from the Asian crisis. The troubles in Asia have also helped head off a new interest rate hike by the Federal Reserve.
Without the Asian turmoil, analysts say, Fed policymakers almost certainly would have boosted rates to head off inflation pressures. Instead, uncertainty about the near-term effect of the Asian crisis here--combined with fears of worsening the slump in Asia--has dissuaded them from tightening money. Partly as a result, the U.S. economic boom has gone on unchecked.
But since February, the fallout from the Asian crisis has been increasingly negative. First, export orders from Asia began falling off, hurting such U.S. manufacturers as Boeing and Caterpillar, which market vigorously in Asia.
Commerce Department figures show that over the first four months of 1998, U.S. exports to the Asian economies plunged by 27.6% from the same period last year. Exports to South Korea declined by 45%; Indonesia, 43%; Thailand, 26%; Singapore, 11%; and Japan, 10%.
Then, thanks partly to the depreciation of Asian currencies, import prices here started to decline. Prices of imported goods from the newly industrializing countries of Asia fell 1.2% in June to a point 8.8% below their level of a year earlier.
Although the effect has been delayed--because Asian countries have lacked capital to export much--it is now beginning to squeeze U.S. auto makers, textile producers and other industries that compete against foreign-made goods.
Finally, the failure of many U.S. businesses to adjust their production rates earlier has led to a glut in inventories--a prime cause of economic slowdowns in previous years--suggesting that many companies might have to brake their output sharply in coming months.
Indeed, the weakness in manufacturing has begun taking a toll on job growth here. The number of jobs created slowed to 205,000 in June--a respectable enough rise but well short of the average of 268,000 over the previous 12 months.
Further, there are indications that the crisis might be having ripple effects on other U.S. industries. The National Assn. of Purchasing Managers reported last week that its monthly index of nonmanufacturing activity fell by 4%.
The weakness in manufacturing is also beginning to cloud the outlook for many big U.S. industrial and high-technology firms’ profit margins, hurting their stock prices and threatening Wall Street’s boom.
Lawrence Chimerine, economist at the Economic Strategy Institute, a nonpartisan research group, estimates that the deeper-than-expected slump in Asia will trim as much as a full percentage point from the U.S. growth rate in 1998--twice as much as predicted a year ago.
The consensus among economists now seems to be that America’s output will grow at an annual rate somewhat below 3% during the second half of 1998, with a significant number predicting a growth rate closer to 2.5%--the Fed’s longtime “optimal” target.
Some analysts are decidedly more pessimistic. In a Wall Street Journal survey of 55 economists, 10 forecast that growth in the United States will slow to an annual rate of 1% to 1.5% during the second half of this year or early in 1999.
Primark’s Sinai counsels against overconfidence bred by the current, extraordinarily robust U.S. economy. The Asian crisis contains “every kind of financial instability that’s ever been seen--from banking collapses to currency crises--all in one test tube,” he contends. It is “unprecedented” in its potential for wreaking serious damage not only in Asia but also in the U.S.
With countries now tied tightly together by trade, investment and finance, Sinai warns, a major new run on Asian currencies could quickly sour global financial markets. “The issue for the U.S. is, how much spillover will there be?”