U.S. economy begins to feel Asian crisis

U.S. economy begins to feel Asian crisis

By Martin Halusa

NEW YORK (DPA): The sharp economic slowdown in Asia is starting to be felt in certain regions of the United States, according to a report by the Federal Reserve which compares growth in its 12 regional districts.

Seven of the districts of the "Fed" -- the U.S. central bank -- have reported declining sales to Asia since the onset of the financial crisis there. Most affected so far are the computer industry around the San Francisco region, which includes Silicon Valley, manufacturing industries in New England, and the textile producers farther south along the Atlantic coast in states such as Virginia, Maryland and the Carolinas.

Moreover, these companies are complaining not only of less demand from Asia, but of falling sales in their own and other markets due to tougher competition from Asian exporters.

These companies have gained in competitiveness following the sharp currency devaluations in many of the Asian countries. With the U.S. dollar remaining strong, American-made goods and services have become relatively more expensive.

And yet, despite these negative factors outlined in the most recent issue of the report, the so-called "Beige Book," the Fed's vice-chairman, Alice Rivlin, insisted that the overall American economy was in "excellent shape."

According to the Beige Book, growth has remained strong, even if some cooling is expected in coming months. Indeed: the U.S. economy grew by an annualized 4.8 percent during the first quarter, but many analysts and economists expect that pace to slow markedly, perhaps down by up to two percent, in the second quarter.

This could put pressure on the Fed to leave interest rates unchanged at its next meeting, on tomorrow. It last raised rates in March 1997.

Inflation in the United States, meanwhile, remains at its lowest level in three decades, and the same can be said of unemployment, with several of the Fed districts even reporting some labor shortages. This tightness in the labor market, however, has so far not translated into any detectable upward pressure on wages.

"Production and employment remain high, while inflation remains low," according to the Beige Book. "The economy is still on course for growth."

In most Fed districts, manufacturing -- which is most susceptible to weakening demand abroad -- remains robust. This is especially true of the districts centered in St. Louis, Chicago and Kansas City; the regions centered in Atlanta, Dallas and Richmond, Virginia are reporting weakness, along with New England.

Despite these weak points, the Beige Book predicts that the economy can expect continued growth, with private consumption and a high rate of investment in new factories and plant and equipment taking up the slack from any fall in exports.

The building sector is also doing well. Only agriculture is hurting badly, but this has less to do with the crisis in Asia than with falling grain and livestock prices.

Indeed, in Rivlin's view the U.S. economy has never been healthier. "We all reckoned on a drop (in the growth rate)," she said. "But the drop has been less than we expected."

However, the Asian crisis is worse than expected, and while it continues the hopes that all regions of the United States could get back to higher growth are withering. Asian turbulence has clearly had an impact.

The key to a recovery in Asia is in Japan, but the Beige Book cites a "serious recession" there. Representatives of the G7 industrial nations, along with their counterparts from some Asian countries, warned Japan on June 20 that it "urgently needed" to restructure its wobbly financial system.

If the Japanese did so in a comprehensive way, they were told, the worst might be over by the end of this year.

At the same time, Rivlin, the deputy to the Federal Reserve Board chairman Alan Greenspan, still appeared worried about further tightening in the U.S. labor market. Years of strong growth have tightened it to the point where it "is the greatest danger for the future development of inflation," the Beige Book warned.

Pessimists on the stock markets took this as a hint that the central bank is toying with a rise in interest rates.