Economics Update (October-December 1998)

Global Crises to Slow Growth,
But U.S. Outlook Is Positive

T he U.S. economic outlook remains positive, although the international situation will certainly slow growth, according to Mike Chriszt, a senior economic analyst at the Federal Reserve Bank of Atlanta, speaking to the Atlanta Fed's Small Business, Agriculture and Labor Advisory Council. Chriszt pointed to prospects for continued low inflation, robust labor markets, prudent fiscal and monetary policies, and respectable output growth as evidence of the U.S. economy's overall health.

But developments in the international arena are likely to dampen growth in the U.S. economy even though exports account for less than 10 percent of gross domestic product (GDP). Roughly one-fifth of U.S. export markets, including Japan, are in recession, Chriszt said, and about another 50 percent are slowing. What's more, the 25 percent rise in the dollar since 1995 exacerbates American export problems.

Economic Developments

Chriszt noted that other countries less in the headlines are having economic difficulties that could affect U.S. growth, even if only indirectly. For instance, low commodity prices worldwide are hurting the value of exports and, in turn, GDP in Canada, which relies heavily on international sales of its mineral and agricultural goods. Canada is the United States' largest trading partner.

Indirect effects on the U.S. economy may come from other sources as well. For example, the European economies, also a major consumer of American products, could be adversely affected by Russia's economic troubles.

U.S. Exports to Selected Regions

U.S. Exports to Selected Regions
Note: Daily stock market closings normalized to 100 as of Oct. 1, 1997
Source: Federal Reserve Bank of Atlanta

Direct Concerns

Ultimately, vulnerabilities in Latin America are of the most direct concern, said Chriszt, since these economies absorb 20 percent of U.S. exports — the equivalent of Canada's share of U.S. goods sold abroad (see chart).

Chriszt, who heads the Atlanta Fed's Latin American Research Group, cited a number of reasons for the region's problems, including the decline in commodity prices, fiscal deficits and overvalued currencies. Many Latin American countries have come a long way toward bolstering their foreign reserve holdings and stabilizing their political systems as well as building their economic infrastructure by implementing new accounting practices, commercial laws and the like. Nonetheless, Chriszt said, many firms are likely to be hurt in the present circumstances.

U.S. Outlook

The international situation is complicated and changing daily. What is clear is that overseas developments will have a negative impact on the U.S. economy. At present, data do not suggest significant problems for the U.S. economy. Economic growth is expected to slow modestly, and inflation and unemployment should remain low, near current levels.

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