Asian crisis curbs U.S. growth, analysts say

Asian crisis curbs U.S. growth, analysts say

NEW YORK (Reuters): An ongoing financial crisis in southeast Asia will probably curb U.S. economic growth, and possibly influence how the Federal Reserve handles monetary policy in the near future, Fed sources and analysts said.

"There is undoubtedly going to be some effect from Asian economies slowing a bit on the U.S. economy," a Fed source, who asked not to be named, told Reuters on Monday.

"If Asian demand slows down, and those countries being

trading partners of the United States, that would have to slow down demand for U.S. goods in Asia," the source added.

A benchmark model compiled by Chase Manhattan Bank on Monday showed the crisis in Asia was likely to retard U.S. Gross Domestic Product (GDP) growth by 0.5 percent in 1998 and 1999.

The model-based test assumed financial markets would remain roughly stable from this point forward.

"We know it's an optimistic assumption, but the numbers give us an idea of the impact of the Asian crisis can have on our economy," said James Glassman, senior economist at Chase Securities Inc.

On Monday, the Dow Jones Industrial Average index staged its largest point drop in history, ending at 7,161.15, down an unprecedented 554.26 points.

Meanwhile, scared investors flocked to the safe haven of the U.S. Treasury market, boosting the benchmark 30-year bond up 1- 20/32 points to 102-30/32.

The rally brought the bond yield to 6.16 percent, the lowest level since mid-February 1996.

Wall Street experts said the Asian crisis, which escalated after Hong Kong stock prices plunged 18 percent last week, was likely to slow the U.S. economy through three basic channels: exchange rates, wealth and supply.

* The exchange rate channel: The depreciation of several Asian currencies has made U.S. goods more expansive in those countries, while making Asian products cheaper to Americans. This phenomenon might make the U.S. trade deficit grow at an even faster rate than it has widened in recent months given the dollar's current strength.

* The wealth channel: The plunge in Asian stocks has reduced financial wealth in that region. The spillover U.S. stock markets, which also dropped sharply over the last few days, tends to shake American consumers' confidence in the economy going forward. Those trends could slow demand for U.S. goods both domestically and on foreign markets.

* The supply effect: An economic slowdown in Asia would probably boost excess global capacity while increasing competitiveness. This could ultimately put downward pressures on prices, and keep inflation low.

"These events in Asia are becoming an important element of this outlook now. It's going to reinforce the idea the U.S. economy can slow down on its own, without creating too much inflation," Chase's Glassman said.

In such an environment, analysts said it is hard to find elements that would justify a change in the course of the U.S. monetary policy in the near future.

"The specter of worsening economic slowdown in Asia promises further disinflationary effects on the U.S. economy," Robert DiClemente, chief U.S. economist at Salomon Brothers, said in a report.