Economy OK, but Experts Warn of Risks
The U.S. economy remains sound despite the wild--and mostly downhill--ride in U.S. and global financial markets, but the risk that the economy here could turn sour has grown substantially higher in recent days, economists said Tuesday.
Although few are yet predicting a recession, analysts point out that even today’s robust economic growth and low inflation will not inoculate the United States against a global economic downturn if one finally comes.
Moreover, government policymakers are likely to be slow to act against a possible recession over the next several months--both because they first want to be sure the economy is really slowing and because they have few new ideas about what to do.
Even the Federal Reserve Board, which is under pressure to cut interest rates to help spur the stock market and ease the burden on Asia’s economies, is not expected to rush to judgment.
The Fed’s policy-setting Federal Open Market Committee is scheduled to meet Sept. 29. But unless the world economy takes a dramatic turn for the worse, it may wait until later in the fall to decide whether to reduce interest rates.
Albert M. Wojnilower, economist at the Clipper Group, says it usually takes so long for the impact of a slide in financial markets to work its way through the entire economy that the latest plunge is not likely to affect growth for several more months.
Wojnilower called the economic situation more “accident-prone” than it was a few weeks ago, but “I haven’t crossed that bridge yet” of whether the United States is heading for a recession.
Randell Moore, compiler of Blue Chip Economic Indicators, which regularly surveys economists’ medium-term forecasts, says analysts have not lowered their expectations much in the wake of the past week’s stock-market plunge.
“I think that right now, for most economists, it’s ‘wait and watch,’ ” he said.
The view that the economy remains sound was underscored Tuesday by a spate of new figures: Construction hit a record high. The index of leading indicators rose smartly, suggesting future economic growth. And a key index of manufacturing activity rose slightly.
“Our economy’s in very good shape,” said Stan Shipley, chief economist for Merrill Lynch & Co. That, in turn, better positions the United States to withstand many of the economic shocks from abroad, he and other analysts assert.
The worst-case scenario is frightening: The decline in stock prices spooks American consumers, who cut their spending sharply, taking the steam out of the U.S. economic boom. Corporate profits--already under pressure because of declining exports--quickly slump and investment falls off.
The slowdown in the United States feeds the deterioration of the global economy. That, combined with the continuing decline in value of many of the world’s currencies, further erodes the market for American exports and hits U.S. companies with fierce competition from abroad.
But there are grounds for optimism. Consumers here do not seem to be panicking over the stock market decline, at least not yet. David A. Wyss, economist at Standard & Poor’s DRI, a Massachusetts-based forecasting firm, asserts that stock market declines historically have had a relatively modest impact on consumer spending.
Studies show that a large portion of the corporate stock in America is held by pension funds, which almost always take a long-term approach. While individual investors own far more stock than ever before, they so far have resisted a major sell-off.
Many economists also believe that the slumps in the stock market and currency markets continue to be primarily a separate phenomenon that has no direct relationship to the “real” U.S. economic situation in the United States--and therefore should be treated as such.
Stephen S. Roach, chief economist for Morgan Stanley Dean Witter & Co., said the current turmoil in the markets “has all the symptoms of a full-blown financial crisis” that “has little to do with the soundness of the economy.”
As a result, Roach argued, policymakers should “put on their hats and concentrate on containing the [financial] crisis”--by coordinating a series of interest-rate cuts in the big industrial countries and by no longer requiring hard-hit countries to adopt policies of economic austerity.
U.S. policymakers, however, are clearly not ready to charge into the fray.
And Federal Reserve Board policymakers, worried about the possible inflationary impact of tight labor markets at home, do not want to add to that pressure by cutting interest rates prematurely.
Memories of the Fed’s performance after the stock-market crash of October 1987 are still painful. Overestimating the crash’s economic impact, the Fed cut interest rates quickly, exacerbating an inflationary period that helped lead to the 1991-1992 recession.
Nevertheless, in a view shared by many analysts, John Lipsky, chief economist for Chase Manhattan Bank, who has been an accurate forecaster of the impact of the Asian crisis, says the danger faced by the United States is growing daily.
Ed Yardeni, chief economist at Deutsche Morgan Grenfell, agreed. “Our economy still is sound, but that doesn’t mean much if the global economy is unstable,” Yardeni said.
