Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will the Tenth District Catch the Asian Flu?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will the Tenth District Catch the Asian Flu?

Article excerpt

Recently, a number of Asian economies have been roiled by financial problems, including evaluations of their currencies on international markets and sharp declines in the market valuations of publicly traded companies. The recent problems in Asia have led many analysts to sharply reduce their forecasts for Asian economic growth over the next few years and, consequently, to expect exports to Asia either to fall sharply or face stagnant growth until these problems are resolved. Lower growth in Asian exports in turn could slow growth in the U.S. economy.

While the impacts of Asian financial turmoil on the United States have been widely discussed and studied, few analysts have looked closely at the likely impact on the Tenth District economy. Two important sectors of the Tenth District economy are likely to be affected by the Asian economic crisis: manufacturing and agriculture.

District manufacturing activity is concentrated in several industries that could be negatively affected by the Asian crisis, especially electronics and food processing. Moreover, manufacturing activity has risen sharply in Tenth District states in recent years and manufacturing employment now accounts for almost 13 percent of total employment in the district, making declines in manufacturing activity potentially serious for the district.

Another important sector in the Tenth District economy is agriculture, which accounts for a large share of economic activity in some district states. Moreover, agriculture is heavily dependent on exports to support demand for its products and boost prices. Recently, agricultural exports have boomed and Asian countries have been important customers, leading most analysts to be concerned about the impact of the Asian crisis on U.S. agriculture.

This article examines the negative impacts of the Asian financial turmoil on the Tenth District economy and finds that, while the overall impact of Asia on the district economy is likely to be moderate, some segments of the economy could be hurt significantly. In particular, some important manufacturing sectors could suffer, such as electronic and electric equipment, instruments and related products, and industrial machinery and equipment. In agriculture, specific commodities such as wheat, soybeans, and red meats are also likely to be affected by the Asian crisis as export demand from Asian countries shrinks, putting downward pressures on prices.

The first section of the article summarizes the recent developments in Asian financial and equity markets, focusing on those countries that have had the most severe problems or present the greatest risk for the United States. The second section discusses the impact of the crisis on district manufacturers by examining the share of district output that is exported to Asia and the major export markets for district goods. The third section examines the impact on agriculture, focusing on the importance of Asian markets for U.S. agricultural exports generally and on exports of major agricultural commodities individually.

I. HOW SEVERE IS THE ASIAN CRISIS?

The recent turmoil in Asia has been widely discussed in both the popular and business press. Yet the magnitude of the problems confronting these economies and, more important, the varieties of experience across Asia are perhaps still not fully appreciated. To determine the impact on Tenth District businesses, it is important to understand which economies have been severely affected, which economies remain susceptible to currency or other financial problems, and the sources of remaining risks in Asia.

The magnitude of currency and financial market volitility in various Asian countries is shown in Table 1. Five countries have undergone sharp declines in currency and equity values and have been singled out as "severely distressed"Indonesia, Korea, Malaysia, the Philippines, and Thailand. These countries are referred to as the "Group of Five" in this article. …

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