U.S. Economy Eluding Asian Woes--Thus Far
The forecasted damage to the U.S. economy from Asia’s woes is taking a very slow boat to get here, raising questions about whether analysts have far overestimated the ultimate effect.
While the U.S. stock market seems to be celebrating that possibility--with another record high on the Dow Jones industrials on Tuesday--bond traders are pushing long-term yields sharply higher, fearing more economic vigor.
The yield on the benchmark 30-year U.S. Treasury bond ended at 6.07% on Tuesday, up from 6% on Monday and the highest since Dec. 10. That, in turn, has lifted mortgage rates to four-week highs, with more increases likely in coming days.
With much of East Asia in recession or on the verge, a result of the collapse in the region’s currencies and banking systems last fall, economists have been almost universal in forecasting a measurable hit to U.S. business activity this year.
East Asia, after all, accounts for nearly one-third of the global economy. How could the turmoil there not affect the United States, as a major trading partner and investor?
Yet despite indications from many individual U.S. companies that Asia’s troubles are beginning to bite, the economy overall has continued to chug ahead, as reports of key data in recent days have shown:
* The government on Tuesday said new-home sales in January rose at the fastest pace since 1993. Meanwhile, the Conference Board said its index of leading economic indicators was flat in January, suggesting that the economy’s growth may be moderating, but with no sign of a sharp deceleration. (Story, D3)
* On Monday, the government reported unexpected strength in January construction activity and in personal income--the latter being an important indicator of potential consumer spending down the road.
* Also Monday, one of the first reports on February economic trends--the National Assn. of Purchasing Managers’ index of manufacturing activity--showed a surprising gain after three straight months of declines.
* Last week, reports showed U.S. consumer confidence at a record high. And Federal Reserve Board Chairman Alan Greenspan, in testimony on Capitol Hill, openly questioned whether Asia’s woes would be enough to meaningfully slow the U.S. economy.
On Tuesday, Greenspan turned more obtuse in his commentary, telling a Senate Foreign Operations subcommittee that there was a “small but not negligible probability” that Asia’s problems could have unexpectedly large effects worldwide.
To be sure, some economic data in recent weeks have hinted at trouble--most notably, the report on January durable-goods orders.
But overall, many economists concede that the first quarter is shaping up better than expected. The economy “is off to a good start, exhibiting little drag from Asian turmoil,” said Paul Kasriel, economist at Northern Trust Co. in Chicago.
“You have a dearth of convincing evidence that the Asian crisis is going to put more than a dent” in the U.S. economy, said John Lonski, economist at Moody’s Investors Service in New York.
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All of which has given the bond market indigestion. Bond yields had tumbled to 20-year lows in mid-January, as a renewed plunge in Asian currencies triggered fears of a deep global economic slowdown. The 30-year Treasury bond yield bottomed at 5.69% on Jan. 12.
But the continuing stream of positive economic reports has pushed rates steadily higher in recent weeks, on fears that Greenspan will be tempted to tighten credit if the economy fails to slow soon.
At the same time, rallies in stock markets worldwide--even in battered Asia--suggest that, at the very least, investors don’t expect the global economic picture to worsen significantly.
Could the Asian crisis just blow over the United States? Many economists insist that their forecasts of weaker growth will come true, if belatedly.
“The U.S. [economy’s] fundamentals are great, but that doesn’t mean that other things don’t matter,” said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York.
He predicts that U.S. economic growth will slow to a 1.5% real annualized rate in the first half of this year, down sharply from 3.9% in the fourth quarter, as Asia’s weakness begins to clip demand for U.S. exports and as cheap Asian goods flood U.S. shores, hurting domestic competitors.
The U.S. manufacturing sector, in particular, should be worried, Steinberg said. “Keep in mind that more than one-quarter of all U.S. industrial production is exported,” he said.
Still, manufacturing accounts for a minority of activity in the U.S. economy. This is a services-based economy overall, and one largely driven by domestic consumer activity, with foreign trade (exports and imports, combined) accounting for only about one-fifth of gross domestic product.
The country’s relative self-reliance is what has bolstered the economy this year, analysts say. Mortgage rates at 20-year lows in January fueled a new burst in housing activity, while the warm winter that much of the country has experienced is helping keep retail and business activity humming.
Also, the plunge in oil prices to four-year lows has meant a big savings at the gas pump, which in turn helps keep consumer confidence high.
What’s more, business activity in Europe also has been better-than-expected so far this year, providing more potential demand for U.S. goods and services even as Asian demand ebbs.
Yet many economists say the domestic economy has just been incredibly lucky so far. Why can’t that luck last? For one thing, higher interest rates will soon begin to weigh on mortgage activity and business borrowing, analysts note. Second, most forecasters simply can’t believe that the ripple effects of Asia’s crisis, which has proved so devastating for much of that once fast-growing region, will go unnoticed in the U.S. economy for much longer.
“It could be that our economy is so big and so strong that [Asia] won’t make” a difference, said David Jones, economist at Aubrey G. Lanston & Co. in New York. “But my best guess is that it will.”
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Tom Petruno can be reached at tom.petruno@latimes.com
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What Crisis?
Stock markets have been rallying worldwide this year, suggesting that concerns about significant economic weakness ahead are overblown. Year-to-date gains in key markets, measured in native currencies:
South Korea: +51.7%
Spain: +25.9%
France: +13.9%
Britain: +13.1%
Germany: +12.7%
Japan: +12.2%
U.S. (S&P; 500): +8.4%
Brazil: +7.3%
Hong Kong: +6.6%
Canada: +6.6%
Singapore: +4.1%
Source: Bloomberg News
