Recession................
July 16, 2001
The Outlook
The U.S. capital-spending bust has finally caused a recession. The sad milestone wasn't recorded here, but in Singapore, where plunging electronics exports have now produced two consecutive quarters of declining output.
Singapore may not be the last of America's trading partners so fated. Taiwan's unemployment rate hit a record high in May. Growth has slowed to a crawl in Germany. And Argentina's financial woes are just the latest problem for Mexico, where slumping exports to the U.S. caused the economy to contract in the first quarter.
Although always key to the global economy, the U.S. in recent years has become, thanks to red-hot growth at home and a series of crises that leveled many economies abroad, the consumer of last resort. Since 1990, America's annual imports of goods have soared by $741 billion, more than Canada's gross domestic product. At $1.25 trillion last year, they represented almost 6% of the rest of the world's GDP, up from 3.1% in 1990, though the U.S. share was accentuated by the dollar's rise. But since late last year, the U.S. has given up its leadership.
"When you lose the leadership, the new connectivity of globalization kicks in with a vengeance," says Stephen Roach, Morgan Stanley's chief economist. "And as we export our weakness overseas, we have to deal with the feedback on our export business, which is exacerbated by the strong dollar."
The impact abroad of the U.S. slowdown has been magnified by its concentration in investment spending, in particular on technology because of its globally integrated nature. A component may cross a foreign border several times as it moves up the assembly chain into a finished computer, network router or cellphone. More than 60% of the value of new computer purchases in the U.S. is imported, almost double the level in 1987, according to the Council of Economic Advisers. Thus, the boom in tech spending that accounted for almost a third of real U.S. growth in recent years helped pull in massive amounts of imports. Last year, the U.S. spent more on semiconductors and computer accessories from abroad than it did on crude oil.
To be sure, in most countries the domestic market is considerably more important than exports, and there are pockets of strength in Europe and Asia to counter U.S. weakness. But George Magnus, chief economist at UBS Warburg, says the weakest countries now -- Japan, South Korea, Taiwan and Germany -- are those most dependent on capital-goods exports and thus most affected by the U.S. investment bust. Their weakness could radiate through their regions.
German electronics and engineering conglomerate Siemens AG has announced 10,100 job cuts this year, three-quarters of them in Germany, in part "a result of U.S. firms holding back on tech investments," says spokesman Peter Gottal. European Central Bank Vice President Christian Noyer said the economy has slowed more than anticipated because of multinationals responding to weak U.S. sales by chopping investments in Asia and Europe. "They immediately transferred the problem from one region to another for no reason," he says. Many foreign policy makers and businesses now look nervously to the U.S. to discern their own economic fates.
So far, the global pain has arguably been America's gain. J.P. Morgan economists note that "the U.S. demand slowdown has fallen disproportionately on the shoulders of foreign producers."
wsj.com
But as America's trading partners weaken, the risk grows of a feedback to the U.S. Compaq Computer Corp. just upped planned employee dismissals to 8,500, two-thirds of them in the U.S., from 4,500, as sales weakened across Europe.
And here's the worrisome part. The impact on the U.S. could well exceed what trade flows indicate. A new type of global economy has been created since the most recent recession in the early 1990s. The current slowdown is its first major test for the U.S. The unpredictable "contagion" of the late 1990s financial crisis showed how rapidly trouble can spread, especially when capital markets are linked as closely as goods markets. "What is happening amongst our trading partners has a greater effect on the United States than we can readily understand directly," Federal Reserve chairman Alan Greenspan told Congress last month. That, he added, "leads us to be, obviously, quite sensitive to what we see going on abroad."
-- Greg Ip
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