The U.S. economy weathered the "Asian contagion." Then it sidestepped the Russian-ruble meltdown. Even a deep and prolonged recession in Japan -- the world's second-largest economy -- hasn't dented the U.S. economic armor. Now it must deal with the Brazil brownout.
In an era when most experts say the marketplace has become inextricably global, the U.S. economy has so far proved remarkably impervious.
"There is no sign at all of a recession," said Richard Marston, professor of finance at the University of Pennsylvania's Wharton School of Business.
Many economists are pleasantly surprised that the global malaise hasn't infected the U.S. economy, where consumers continue to spend and the stock market rebounded strongly from a nasty -- but mercifully short -- plunge that bottomed Oct. 8. But that's not to say the U.S. market is immune.
Lacy Hunt, an executive vice president with Hoisington Capital Management, an Austin, Texas, bond-management company, said conditions overseas could push the U.S. economy into its first recession since 1990-1991 -- and the first serious one since the early 1980s.
The woes of Brazil -- nearly 45 percent of the Latin America economy and an important U.S. trading partner -- is a serious problem whose impact has yet to be fully understood. Japan's economy remains in very bad shape, Hunt said, contending that's not being fully factored into economic forecasts. Hunt noted two other problem areas he said many economists aren't focusing on: a little-talked-about slowdown that's started in Europe; and spiraling financial and economic problems in China, whose relative health until now has allowed the Asian financial flu to run its course more quickly that it otherwise might have.
Europe, now largely woven together as the European Monetary Union under one currency, the euro, is a market 40 percent larger in population than the United States. (Several countries, including the United Kingdom, declined to join.) A serious slowdown there would definitely be a setback for the world economy.
Nariman Behravesh, chief economist for DRI in Lexington, Mass., said the Brazil, China and -- most of all -- Japan problems are "ticking time bombs" that could be enough to derail the U.S. economic juggernaut.
Japan's banking system is a disaster: Its bad loans are equal to 30 percent of the country's gross domestic product, compared to only 3 percent for the United States during its savings and loan crisis at the start of the decade. The U.S. Resolution Trust Corp., once formed, acted decisively to clean up this country's banking problem more quickly -- and more cheaply -- than expected. Japan is about seven years into its crisis and little real progress has been made.
The banking problems are a serious drag on the Japanese economy and, if they aren't resolved, they could push Japan even deeper into recession, Behravesh said.
China's growth slowed to 7.8 percent in 1998, its leaders said, but it probably grew at only 4 percent to 5 percent -- and shouldn't do any better this year, Behravesh said. Worse still, a major investment trust in China failed this month and many experts -- including Hunt and Behravesh -- expect that country to devalue its currency, the renminbi, this year. That would make Chinese products cheaper than those exported by other countries in the region. And because many of those countries are trying to use exports as a way to generate income and pull themselves out of their problems, they might then have to devalue their currencies in kind to keep their products price-competitive. That could start the Asian contagion anew.
Behravesh said DRI puts the chances of a U.S. recession at 15 percent this year and 30 percent in 2000. But if some incident -- a strike, a problem abroad or something as mundane as an offhand comment by Federal Reserve Chairman Alan Greenspan -- sends the U.S. stock market reeling, consumers, feeling poorer, could snap shut their wallets and stop spending, making a recession more likely.
Two-thirds of the $8 trillion U.S. economy is fueled by consumer spending -- the very factor that up to now has inoculated this country against the financial problems abroad, said Wharton's Marston. Right now, consumers feel reasonably well off. The country's private savings rate has "gone negative," meaning savings are being drawn down to spend.
"The U.S. consumer has gone on a real spending binge," Marston said.
But this benefit from the "wealth effect" could disappear in a hurry, said Steve H. Hanke, an economist and professor in the Johns Hopkins University Department of Geography and Environmental Engineering.
"I think we are living in fairly dangerous times from the investor's point of view," Hanke said. "And most people, particularly in the U.S., just don't have a clue -- particularly younger people -- of what could hit their assets in a hurry. They can really dissipate in no time. So I would just send out a wake-up call: Now is the time to be defensive with your assets.
"We have lots of potential major international problems that could come back to haunt us," he said. "If any of these regional problems blow up, they could trigger some bad news for the stock market because I think the stock market's quite vulnerable."
Pub Date: 01/24/99