How the Global Crisis
Affects Your World
By AMY FELDMAN and PETER GRANT
Daily News Business Writers
<Picture>t's getting scary out there. World economies are imploding and the American economy — now in its eighth year of expansion — no longer looks immune.
Even cautious economists, typically unlikely to use the R-word, have begun talking about the prospect of a domestic recession.
Merrill Lynch, for example, now puts the odds of a recession within the next year at about 1-in-3. Going one step further, J.P. Morgan forecasts that the economy will lapse into a recession in 1999.
"Internationally, country after country is blowing up," said Stan Shipley, a senior economist at Merrill. "A lot of countries are in effect giant hedge funds ... and things are not going well for them."
The global problems may seem distant, but because our economy sells a lot of products abroad, the impact of a slowdown overseas could dampen demand for American exports.
Already, the economic crisis has hurt U.S. corporate profits: They're projected to decline 2.4% in the third quarter, the first such decline since the third quarter of 1991, when our economy was in recession.
While interest rates (below 5%) and unemployment (4.6%) remain low, and inflation (1.6%) is practically nonexistent — two key factors in avoiding a recession — other indicators, from declining consumer confidence to sluggish job creation, are beginning to look ominous.
The question now is whether the United States can remain an island of prosperity. Here's a guide to the world's troubled hotspots and the effect on the American economy:
China
China is surrounded by trading partners throughout Asia that have been slashing their exchange rates and sinking into recession. So far, the huge country has held up, but the fear is it will be forced to cut the value of its currency and its economy will go into a tailspin. China is America's fourth-largest U.S. trading partner and had been a favorite investment target of U.S. telecommunications and wireless companies because of its enormous untapped market.
Japan
Japan, the world's second-largest economy, is at a dangerous crossroads. Earlier this week, Japanese officials warned that their country's banking system was in deep trouble because banks had such huge loans and so little cash on hand. Meanwhile, Japan slashed its forecast for next year's economy from growth of 1.9% to a retreat of 1.8%. And the Japanese stock market, which has powered ahead for years, hit the skids this week, sinking below the 13,000 mark for the first time in 12 years. Japan is the second-largest American trading partner. Last year, it bought $65.5 billion worth of American goods — or more than 9% of all U.S. exports — in effect, supporting an estimated 1 million American jobs.
Southeast Asia
The area where the financial crisis hit hard last year has swept from Thailand to Indonesia, Malaysia and South Korea. Suddenly, fast-growing Asian economies looked like paper tigers and international investment in the region dried up. As a region, Asia accounted for $213.5 billion of U.S. exports, or nearly one-third of the total, last year, with South Korea alone representing $25 billion of that.
Latin America and South America
Brazil's economy is on the brink of recession, with investors pulling out large sums of money. If Brazil goes, the fear is that it could take Chile, Argentina and Venezuela with it. Combined, those countries are an important trading bloc for the United States — accounting for some 10% of our exports. U.S. corporations from Citicorp to energy giant Enron have operations in the region. And Bestfoods, maker of Skippy peanut and Hellman's mayonnaise, gets about one-fifth of its earnings from the Americas — including from operations in Brazil.
Russia
The Russian economy went into freefall in August. Short-term interest rates shot above 100%, the ruble plummeted and Russia defaulted on its debt. Millions of Russian workers have yet to be paid. While Russia is not a major U.S. trading partner, it has become a hot market for American telecommunications firms and oil companies. Some major investors lost a fortune when speculating on Russian markets became practically worthless, and a number of hedge funds announced heavy losses on their Russian investments.
12-Month Dow Performance
Oct 27, 1997: Dow drops 7% or 554.26 points — the biggest point drop in history — and trading in stocks is halted for part of the day
Jan. 2, 1998: Dow closes at 7965.04 on first trading day of the new year.
April 6, 1998: Dow closes above 9,000 for first time.
July 17, 1998: Dow hits all-time peak of 9337.97.
Aug 31, 1998: Dow drops 6% or 512.61 points, second biggest point drop ever.
Consumer Confidence
Consumer confidence measures average American sentiment about the U.S. economy. A drop in the consumer confidence index could lead to decreases in retail spending, which, in turn could eventually lead to lay-offs. The drop in the index was the third in three months.
Lay-Offs
The global economic crisis is already hitting home with job cuts — particularly by manufacturers who sell their goods to Asia. High tech giant Motorola is slashing 7,800 jobs. Gillette, the world's biggest razor maker, is cutting 4,700 workers. And Boeing, the aircraft manufacturer, is laying off 28,000 workers.
Gross Domestic Product
After jumping in the first quarter of 1998, American gross domestic product — the sum of all goods and services produced in the U.S. — dropped sharply in the second quarter.
An American Company Overseas
Like most other U.S. consumer product companies, Colgate-Palmolive has been hurt by the financial turmoil in Asia. Sales of Colgate's toothpaste and soap products, like Palmolive and Ajax, plunged 14% in the company's Asia-Africa division in the second quarter. In the past year, Colgate's stock has gone from a high of nearly $100 a share to yesterday's close of $75.
What Is a Recession?
Economists define it as two consecutive quarters where the gross domestic product, or GDP, doesn't grow. Economists and policymakers are worried that the U.S. economic slowdown — the GDP growth rate has already weakened — could lead to a recession in 1999. For example, Merrill Lynch forecasts the chance of a U.S. recession within the next year at 1-in-3.
Original Publication Date: 10/08/1998
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