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.