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To: 2MAR$ who wrote (40)	4/27/2001 5:13:58 PM
From: 2MAR$	Read Replies (1) \| Respond to of 208838

US Is Growing, But By Transferring Its Slowdown Overseas By John Hardy Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The Commerce Department's announcement Friday that gross domestic product grew by a surprisingly strong 2.0% in the first quarter was unambiguously good news for the U.S. economy. But the numbers weren't so great for economies elsewhere in the world. A major contributor to the better-than-expected out-turn was an improvement in the U.S. trade balance and especially a decrease of 10.4% in imports during the quarter. This sharp reduction was well in excess of the 2.2% fall in exports, making the trade portion a net addition to GDP. And, while the net decline in imports was a convenient offset to a sharp fall in inventories - suggesting that businesses turned to domestic supplier for much of whatever wholesale purchases they did need to make - it's an outright negative for America's trading partners. Lower U.S. imports means lower exports for countries that sell to the U.S. markets. In effect, much of the slack generated by a slowdown in demand was simply transferred overseas. That tradeoff was reflected in the dollar Friday. Immediately following the release of the new data, the U.S. currency gained more than one percent against the previously robust euro and held on to recent highs against the yen. As U.S. trading partners are faced with a decline in exports, expectations for growth in these countries are scaled back right at the time that growth forecasts in the U.S. are being increased. That has a direct effect on currency levels, which are ultimately driven by relative economic performance. "The pattern that is emerging is that domestic weakness in the U.S. is already having a significant effect overseas," said Tim Duy, senior currency analyst at the G7 Group in Washington. "In effect, the trade deficit is falling, despite the continued strength of the dollar," he commented. Caveats And Caution The first thing to note, however, is that there is considerable doubt among international economists as to the whether this apparent drop in U.S.imports reflects the pattern for the whole quarter. There are still two revisions to first quarter GDP yet to come. Kevin Harris, international economist at MCM Currencywatch in New York, is skeptical of the data. "We don't have trade data for the entire quarter," he said. "Commerce has assumed that the slowdown in imports (in the first two months) follows through to the end of the quarter - that seems unlikely." In fact, Harris sees the drop in imports as "a statistical blip." However, as the world adjusts to the reality of slower economic growth and more competitive export markets, there are likely to be some clear losers from any ongoing slowdown in U.S. import demand. Based on the U.S. trade data for the first two months of the year, the loss of export sales to the U.S is most apparent in the Pacific Rim and the members of the Organization of Petroleum Exporting Countries. Western Europe saw only a modest drop-off and Japan actually enjoyed an uptick in sales. Based on these trends and other factors, economists argue that areas most adversely affected by a slowdown in U.S. demand will be Europe, Southeast Asia and Latin America. Within the euro zone, meanwhile, Germany will probably take the biggest hit as it acts as the focal point for euro-zone exports to the U.S. and elsewhere, economists say. "Germany collects up European goods and sends them out to other areas of the world," said Harris, who notes that German economic forecasts have already been cut back in anticipation of a slowdown. Asia is particularly hard hit by a slowdown in U.S. demand for high-technology imports. With the Japanese economy already in a very fragile state, it is clear that slowing export sales will be a major concern and will add to the pressure on the new government to allow the yen to slide lower. However, other countries in the Asia region are likely to be even more seriously affected. "Non-Japan Asia is going to get crushed," said Larry Greenberg, international economist at Ried Thunberg in Westport, Conn. Finally, Mexico and the countries of Latin America look very exposed to falling U.S. demand, but opinion is divided as to the likely impact. Harris believes that "Mexico will be the biggest loser in dollar terms," and sees problems elsewhere in the region as more related to a slowing of investment flows than directly to declining export sales. The G7 Group's Duy that Mexico will be able to get by quite well, however. "We are not worried about Mexico; they have weathered this better than anyone expected and their relationship with the U.S. puts them in a better position than five years ago," he said. Indeed, some people are putting a more positive spin on the U.S. economy itself, following Friday's GDP numbers, which might mean that eventually every country with any sort of "relationship" with the U.S. will be saved from the worst. In the short term a slide in imports is going to hurt every U.S. trading partner, but later on, the flipside effect that it can create - healthier performance for U.S. domestic growth - may glimmer as a silver lining to this economic cloud. -By John Hardy, Dow Jones Newswires; 201-938-2122; john.hardy@dowjones.com (END) DOW JONES NEWS 04-27-01 05:12 PM * end of story *