Dodging the Bullet - This Time: The Asian Crisis and U.S. Economic Growth during 1998

Hale, David, Brookings Review

One of the great surprises of the U.S. economy this year has been its capacity to withstand the trade shocks resulting from the Asian financial crisis.

At the end of 1997, most economists were revising down their forecasts of U.S. output growth by 0.5-1.0 percentage point to adjust for the impact of the crisis on both imports and exports. As the United States sends about one-third of its exports to Asia and is the major market for the exports of Asian countries whose currencies have collapsed, the U.S. trade deficit had been widely expected to increase by about $50-60 billion this year. Concern about export losses was especially great on the U.S. west coast, which depends far more heavily on Asian trade than other regions. Worries about tourism also flourished. Las Vegas baccarat tables, for example, suffered a 25 percent slump because of the loss of high rollers from the overseas Chinese communities of Southeast Asia.

During the first quarter of this year the U.S. trade deficit widened by some 2 percent of real GDP. Exports to Indonesia, Thailand, and South Korea slumped by 37 percent during January and February while exports to Japan fell by 7.6 percent. But the trade deterioration did not dampen the U.S. economy's overall growth momentum because the growth rate of domestic final sales accelerated from 1.9 percent to 6.1 percent during the fourth quarter of 1997 and thus boosted the quarterly growth rate of total output from 3.7 percent to 4.2 percent.

WHAT IS DRIVING U.S. GROWTH?

Three factors explain why U.S. domestic spending has remained so robust in the face of trade shocks resulting from the Asia slump.

The first factor is the reduced risk of Federal Reserve tightening. With the U.S. economy growing so robustly last year and unemployment in decline, the Federal Reserve would likely have raised interest rates late last year or early this year had it not been so concerned about financial stability in East Asia. The passivity of U.S. monetary policy helped produce large gains in residential construction and commercial real estate. New home sales rose to the highest level in several years while the Dun and Bradstreet survey found a sharp upturn in business confidence in the construction industry.

The second factor is the resilience of the U.S. equity market. It rose to …

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Publication information: Article title: Dodging the Bullet - This Time: The Asian Crisis and U.S. Economic Growth during 1998. Contributors: Hale, David - Author. Magazine title: Brookings Review. Volume: 16. Issue: 3 Publication date: Summer 1998. Page number: 22+. © 1999 Brookings Institution. COPYRIGHT 1998 Gale Group.

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