Asia Crisis Fuels U.S. Boom
By DAVID HALE
There is little doubt that the economic crisis now gripping East Asia is the most severe shock to the global economy since the end of the Cold War. But it would be wrong to attribute the recent weakness on Wall Street to the crisis.
There is no reason for the Asian crisis to depress the growth rate of the U.S. economy. Instead, it is likely to change the sectoral composition of growth within the economy. The crisis will set the stage for poor performance in companies producing tradable goods, but it will also create opportunities for profit in companies catering to domestic consumption.
The data on the U.S. gross domestic product for the first half of 1998 illustrate how the crisis has changed the U.S. economy's growth mix. There was an unprecedented expansion of the trade deficit, to $252.9 billion during the second quarter of 1998 from $149 billion during the fourth quarter of 1997. This reduced real annual GDP growth by about 2.4% during the first half of 1998. But total annual output growth still averaged about 3.5% because domestic demand grew at a 6.5% annual rate compared with 2.4% during the fourth quarter of 1997. This upsurge was not a lucky accident, but the result of three positive side effects the crisis has had on the U.S. economy.
First, the risk of further financial collapse in Asia and elsewhere has deterred the Federal Reserve from raising interest rates to slow the growth of domestic spending. As a result, the U.S. economy is enjoying higher growth rates for home building, commercial construction and retail sales than it would have without the Asian crisis.
Second, increased foreign demand for American equities and other U.S. financial assets has helped the U.S. withstand the Asia trade shock. The Asia crisis created a surplus pool of global liquidity that has driven U.S. equity prices to unprecedented levels. Foreign investors purchased U.S. equities at an annual rate exceeding $100 billion during the first quarter of 1998, compared with $66 billion during the whole of 1997. The buoyancy of the equity market has boosted household wealth while sending the household savings rate down to only 0.6% during the second quarter, from 2.6% one year ago.
Third, the U.S. has benefited from the impact of the Asian slump on global commodity and import prices. Both have fallen across the board during recent months, helping to boost consumer income by lowering inflation. In fact, it appears that commodity-producing countries will suffer the brunt of the Asian shock wave. Already, the oil-exporting countries have seen their trade balance deteriorate by $61.9 billion compared with only $13 billion for North America. By contrast, the income gains in the U.S. resulting from the decline in import prices appear likely to exceed 1% of GDP this year.
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From an editorial in the Wall Street Journal on 14Aug98
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