Asian Turmoil Has Silver Lining Lower Interest Rates, Energy Prices Benefit U.S. Economy

The biggest plunge in energy prices since the 1991 Persian Gulf War sent wholesale inflation skidding by 0.7 percent in January, and construction of single-family homes shot higher on the strength of low mortgage rates.

Analysts said Wednesday’s two reports provide evidence that the currency turmoil in Asia so far is having mainly positive effects on the U.S. economy.

“At least initially, we are getting more good news from the Asian crisis than bad news,” said Robert Dederick, economist at Northern Trust Co. in Chicago.

Most economists still believe that the fallout from Asia will shave as much as a full percentage point off economic growth this year, as American exporters lose key markets while domestic producers face stiffer competition from suddenly cheaper Asian imports.

The initial impact has helped the U.S. economy, however, by lowering interest rates to spur interestsensitive sectors such as housing and by cutting into global demand for energy, which helps push energy prices sharply lower.

The Labor Department reported that the 0.7 percent plunge in the Producer Price Index, the biggest one-month drop in more than four years, was led by a 3.5 percent decline in energy prices.

It was the fourth consecutive month that energy prices have fallen and the biggest decline since February 1991, when relief over a coming Persian Gulf War victory for U.S.-led forces spurred a rollback in prices.

Analysts said this time around even the prospect of possible new attacks against Iraq has not halted a slide in oil prices that began last fall, reflecting increased production and dampened demand in many troubled Asian economies.

With crude oil prices dropping to a 14-year low this week, economists said the good news on energy should last for some time.

“The potential conflict has failed to arrest the decline in the price of oil, and even a military strike against Iraq would have only a minor impact on world oil markets,” predicted Jerry Jasinowski, president of the National Association of Manufacturers.

In a second report, the Commerce Department said that construction of single-family homes rose 7 percent in January as builders responded to falling mortgage rates, which have spurred both sales and refinancing of current mortgages. The overall starts for new homes and apartments dipped a slight 0.3 percent because of a fall in multifamily units but remained at a strong annual rate of 1.54 million units.

While the robust economy has pushed unemployment to the lowest levels since the early 1970s, inflation at both the wholesale and consumer levels has been well-behaved.

For all of 1997, wholesale prices fell 1.2 percent while consumer prices were up just 1.7 percent. Both were the best performance since 1986, and economists are predicting more of the same this year.

The big drop in wholesale energy costs in January reflected a 7.9 percent plunge in gasoline prices and an 8.9 percent decrease in home heating oil. Analysts said the mild winter has helped hold down heating costs.

Food prices also were lower in January, dropping 0.4 percent in a third monthly decline.

Excluding the volatile energy and food categories, the so-called core rate of inflation edged down by 0.1 percent, matching the December decline.