Asia’s economic woes are starting to infect U.S. industry, stunting 1998’s profit and growth prospects - and leaving the economy vulnerable to financial market turmoil or other shocks.
Analysts already marked down estimates for U.S. growth this year to about 2.5 percent - down from an almost 4.0 percent expansion in 1997, mainly because of Asia. Should the crisis worsen, the risk is that U.S. growth could slow even more. If that happens, the Federal Reserve could decide to cut interest rates to revive the economy, Fed Gov. Laurence Meyer suggested last week.
Even a Fed reduction in U.S. borrowing costs might not be enough, however. “It’s hard to predict recession, but things snowball,” said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Florida. “You get a crisis of confidence. That could kick it off.”
The Standard & Poor’s 500 index of U.S. stocks has lost 3.6 percent of its value in the first seven trading days of 1998 as a number of companies warned earnings are likely to fall as Asia’s crisis cuts into export sales and threatens to hold down U.S. prices.
Atmel Corp., a San Jose, California-based semiconductor maker, cautioned last week it will report a fourth-quarter loss because some customers in Asia haven’t been able to get letters of credit from banks to make purchases.
Paper and pulp manufacturer Albany International Corp., in Albany, New York, last week said fourth-quarter earnings could fall 12 percent because of lower sales in Asia.
Chrysler Corp., Ford Motor Co., and General Motors Corp. are contending with cheap imports from Asia - a byproduct of the strong dollar. Chrysler shares have fallen 9.4 percent so far this year as analysts cut earning estimates because the auto manufacturer continues to rely on generous sales rebates to combat the imports.
“There’s no opportunity for pricing in this market,” Chrysler Chairman Robert Eaton said last week at a Detroit auto show. Prices paid to factories, farmers and other producers, for example, registered the largest decline in more than a decade in 1997, government figures showed last week.
“Any industry in the U.S. with exposure to significant competition in Asia has seen growth potential in those markets come down, and they’ve also seen their ability to raise prices diminish almost completely,” said Laura D’Andrea Tyson, former chairman of President Bill Clinton’s Council of Economic Advisers.
Added a report from economist Ed Hyman’s ISI Group in New York: “The word ‘depression’ is a strong one, but it probably applies to what will unfold in the Pac Rim.”
Yet there is a silver lining. Low inflation and investors’ flight to the safe haven of U.S. Treasury securities have pushed interest rates to record lows. That will probably provide a cushion from some of the financial shocks, and might actually induce consumers to spend, particularly on housing, analysts said.
In financial markets Monday, bonds continued to advance as investors sought refuge from the latest worldwide plunge in stock values. The Treasury’s benchmark 30-year bond rose 1/4, pushing down its yield 2 basis points to 5.71 percent.
U.S. stocks rose for the first time in five days as investors were encouraged by market analysts comments that the Asia crisis might have a muted effect on U.S. corporate earnings.
Goldman Sachs & Co.’s Abby Joseph Cohen, one of the most bullish investment strategists on Wall Street, was not alone in issuing a positive forecast for stocks. “Most (but not all) U.S. companies are well-diversified geographically, and are not overly dependent on any one region,” said Cohen, co-chair of the firm’s investment policy committee. “Further, Asia is often a source of production for U.S. companies rather than a key export market.”
The Dow Jones Industrial Average rose 67 points, or 0.88 percent, to close at 7647.18 - after falling as much as 132 points in early trading.
Still, many companies are reporting that their results are deteriorating as exports stall and prices fall.
Tobacco wholesaler Dimon Inc., of Danville, Virginia, said its fiscal second-quarter earnings will be below expectations, in part because Asian sales were hurt.
Software maker Oracle Corp. and semiconductor equipment maker Kulicke & Soffa Industries Inc. also have warned of poor results in Asia.
Oil companies could take a hit too. World demand will grow at a slower rate in 1998 than forecast because of the Asian crisis, Robert Black, senior vice president of Texaco Inc. said last week in Beijing.
Texaco cut back some refining production at its Caltex refineries in Asia, Black said. Caltex is a joint venture with Chevron Corp.
To complicate matters, trouble at home, such as a stock market rout, could hurt consumer spending, the U.S. economy’s primary engine, analysts said. “This all plays into consumer confidence,” which has been bolstered by big stock market and mutual fund gains, said William Sullivan, of Dean Witter Securities. “The real risk is confidence abruptly erodes and the consumer pulls back.”