Good Times Could Roll to Halt in '99

0 Comments | Insight on the News, Feb 1, 1999 | by Patrice Hill

Some financial analysts are gloomy about the prospects for the U.S. economy.

Americans are set to start another new year secure in the belief their jobs are safe and their incomes are growing. But the economy faces what many analysts believe will be its toughest test this decade: the depressing effect of recessions across half the world that is forecast to slow growth and employment here dramatically.

Americans soon will learn whether a host of precautionary measures put in place by world leaders, led by President Clinton and Federal Reserve Chairman Alan Greenspan, will be enough to keep the United States insulated from the global storm. Most economists say the Fed's three interest-rate cuts since Sept. 29 and Western aid packages aimed at stopping the spread of the crisis in Latin America should protect the U.S. economy.

"The central bank has done an excellent job of calming jitters" about a global recession that sent markets from Hong Kong to Wall Street reeling, says Sung Won Sohn, chief economist at Wells Fargo Co. in Minneapolis. But the recent lull in market turmoil may be temporary. Wall Street stocks have suffered two major drubbings in the last year. Only 10 weeks ago, most indexes had lost 20 percent or more of their value, wiping out all the year's gains. "The world is not out of the danger zone yet," says Sohn, though recent trips to the countries in crisis have convinced him that "the global economy seems to be stabilizing."

In Asia, where the crisis began with a series of currency devaluations, businesses are starting to enjoy greater export sales for the first time in a year. But the demand for their goods at home is still plunging, with no end of recession in sight.

Brazil, a key export market for U.S. companies and the dominant economy in Latin America, is halfway into a recession. The country could become a drag on the entire continent as it tightens its belt and implements tax increases and spending cuts to shrink its bloated budget deficit. A recession in Latin America would bring the crisis to America's doorstep. Right now, the United States and Europe are the only major regions of the world economy still experiencing healthy growth.

Yet the crisis already has taken a toll on U.S. farmers and manufacturers who experienced steep losses in formerly growing export markets. The result has been lower profits and big layoffs. The number of jobs in manufacturing has been shrinking for months. More layoffs lie ahead as U.S. exporters and companies compete with inexpensive imports. Steel companies, deluged with cheap steel from Brazil, Japan and Russia, have cut 5,000 workers and may double that number by the end of the year.

Mostly the crisis eats away at the United States in invisible ways. The trade deficit is draining dollars from the economy and sending them overseas, while deflationary winds from Asia have put pressure on corporate profits, causing businesses to slow spending plans and cut workforces.

Some of the shock waves rippling out of Asia actually have been a boon for U.S. consumers, including falling prices for gas, chicken, wheat, electronics, clothes and shoes. A strong dollar and lower prices and interest rates have sparked a buying binge on everything from cars to computers.

America's voracious appetite for spending and the stock market's revival has prompted some analysts to say the crisis is waning. But Michel Camdessus, managing director of the International Monetary Fund, or IMF, remains cautious about predicting an end to the turmoil. "Is the crisis over? I wouldn't say that," says Camdessus. "We are listening now to some sighs of relief. We can't allow ourselves ... a false sensation of security."

IMF officials mistakenly declared the worst to be over last year just as the crisis was entering a new stage. Now, Camdessus describes it as a "tragedy in four acts" -- the Asian crisis, the Russian crisis, the Latin American crisis and finally the collapse of a high-flying Connecticut hedge fund called Long-Term Capital Management.

"The basic situation around the world is still difficult, and I guess the best you can say realistically is that it's not getting worse," Alice Rivlin, the Fed's vice chairwoman, told reporters last month. But some analysts are downright gloomy about the prospects for the U.S. economy. "We continue to expect recession in 1999," says David A. Levy of the Jerome Levy Economics Institute in Mount Kisco, N.Y., despite the recent comeback of the stock market and American consumers. "The more consumers extend themselves financially, the more wrenching the eventual pullback" when they start saving more of their money. The global economy has not been fixed, cautions Levy, because the remedies adopted by the West do not address the underlying problems of overcapacity in industries from cars to computer chips, or the decline in investment that is cutting off funds for the expansion of business.

Nevertheless, Allen Sinai, president of Primark Decision Economics in New York, sees little chance of recession, thanks to the Fed. Since growth in crisis-stricken regions depends on robust exports to the United States, the Fed will not allow growth here to slow even close to zero, and will move to lower rates again, if necessary, to prevent that from happening next year.