Regional Update (January-March 1998)

Index The State of the States Views from the Region Southeastern Manufacturing Survey Southeastern Economic Indicators

Cover Story - How Will the Asian Financial Crisis Affect the Southeast?

Defense Contractors in the Region Respond to Military Spending Cuts

How Will the Asian Financial
Crisis Affect the Southeast?

A sia is a world away. Or is it? In the 1970s and even the 1980s the economies of the southeastern United States and Asia were quite separate. Today, however, with advances in technology and transportation, these economies are more closely linked than ever before.

Recently much attention has focused on the Asian financial crisis to determine whether troubles in that region will have large-scale spillover effects on the U.S. economy. Closer to home, regional economists, analysts and businesses have tried to pinpoint how and to what degree the recent Asian financial turmoil will affect the southeastern economy.

A Currency and Stock Market Crisis

In 1997 financial storm clouds appeared over many Asian nations as a result of unsustainable government policies, including currency manipulation and weak regulatory environments.

Stock markets in Japan, Hong Kong, the Philippines, South Korea, Malaysia and Thailand experienced significant declines. Additionally, currency dropped substantially against the dollar — in some cases, more than 50 percent — in Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand in 1997. Meanwhile, the Japanese yen has been on a steady decline, down nearly 28 percent against the dollar since 1995.

While some markets and currencies are beginning to stabilize, financial crisis and instability persist in many of these Asian countries.

Direct Effects on the Southeast's Economy

At first glance, one would expect that these Asian countries would be purchasing fewer goods from the United States, including the Southeast, as a result of weakening and declining currency values. For instance, manufacturers of end-use products, such as cars and light trucks, could experience decreased export activity to Asia. In both Georgia and Tennessee, the transportation equipment industry, which includes auto and parts manufacturers, represents a significant export business. In the Southeast, automotive product exports to Japan alone account for approximately 7 percent of the region's manufacturing exports. But other conditions must be considered to gain perspective on how the United States and the Southeast as a whole may potentially be affected by the crisis.

Nationally, exports equate to just 11 percent of U.S. gross domestic product (GDP), and exports to the eight Asian nations hardest hit by the Asian crisis represent approximately 24 percent of total U.S. exports, or only about 2 percent of U.S. GDP. Regionally, just under 15 percent of the Southeast's total exports go to these nations; in contrast, nearly 41 percent of the West Coast's exports go to Asia. Moreover, exports are proportionately less important to the Southeast. For instance, only 5 percent of the Southeast's manufacturing employment is export-related compared with 7 percent of the nation's employment, according to data from the U.S. Census Bureau. Thus, the southeastern economy is much less dependent on exports to Asia — a fact that will help limit any direct negative impact to the region versus other parts of the nation.

Additionally, much of the Southeast's exports to Asia is in intermediate goods, such as paper and forest products and chemicals, which are used to make other products. These goods make up approximately 34 percent of the region's manufacturing exports to Japan alone, which is the Southeast's key export market in Asia. While a stronger dollar translates into Asian nations potentially buying smaller quantities of some U.S. goods, such as computers or other end-use products, these countries should continue to buy the Southeast's intermediate goods that they use to make items for export to the rest of the world. Southeastern manufacturers of two intermediate products, petrochemicals and polymer plastics, believe Asian countries will continue to buy their companies' goods — even though these products will cost more in Asia — because the products will still be cheaper than those of other international competitors.

Aside from exports, the crisis could also have an impact on certain southeastern industries, such as the apparel industry, because of increased imports of Asian-made products, which should cost less to purchase because of these nations' declining currencies. During recent years, employment in the apparel industry in the Southeast has been severely affected by a combination of outsource manufacturing, technological innovations and the industry's reliance on low-wage factories worldwide. In fact, most of the apparel sold in the United States is now manufactured in other parts of the world, especially Asia.

Large-scale Asian apparel imports could further erode this industry's importance in the Southeast. But some apparel and textile manufacturers in the Southeast may be better prepared to face any fallout from the Asian crisis — better prepared, some say, than they were to face earlier foreign competition because only the stronger and more clearly focused apparel firms have survived.

While the Asian crisis may affect some southeastern industries more than others, the overall direct effects on the region's economy, particularly from an export perspective, should be minimal. According to Tom Cunningham, vice president and head of the Atlanta Fed's regional research group, "The economies of the states in the Southeast will continue to grow, just at a somewhat slower pace than originally predicted before the Asian turmoil began last year."

Percentage of U.S. Exports by Region to Asia and NAFTA Countries, 1986
Source: U.S. Department of Commerce, International Trade Administration, Office of Trade and Economic Analysis
Indirect Effects Hold Many Unknowns

Although the direct effects of the Asian crisis seem less significant at this time, the Southeast may feel pressure from the indirect effects, which include the ways the region's trade with traditionally strong trading partners is affected by the crisis. Brazil is a case in point.

As currencies in the Asian nations began to decline in the fall of last year, speculators began to look closely at Brazil's currency, the real. As a result, the Brazilian stock market became quite volatile. To stave off the devaluation of its currency, the Brazilian government instituted a number of measures intended to trim imbalances in both the trade and current account deficits.

In addition to 15 percent budget cuts, government personnel cuts, higher interest rates for business debt and a redirection of selected state funds, Brazil raised the costs for citizens to exit the country, from U.S.$18 to $35. Another measure re-quires that all credit card charges made outside of the country be paid off at the end of each month.

What do these measures mean for the southeastern United States? During the last several years, Brazil has developed into one of Florida's primary trading partners, accounting for approximately 11 percent of the state's total exports. Additionally, given the strength of Brazil's currency since 1994, large numbers of Brazilians have ventured to south and central Florida as tourists. Brazilians have also invested in real estate development, particularly in the Miami area.

Many analysts believe that the fiscal measures Brazil is currently instituting will help in reforming the country in the long term. In the short term, however, Brazil will probably experience less growth than originally anticipated for 1998, a situation that could reduce Florida's exports to Brazil. So, while not having a considerable direct effect on Florida, the Asian crisis could have a negative impact on the state via an economic slowdown in Brazil.

Poultry processing, which is a large business in the Southeast, is another industry experiencing effects from the Asian crisis. Approximately 20 percent of the poultry exports from the United States, and more specifically the Southeast, go to Hong Kong, most of which are then shipped to China, according to the USA Poultry and Egg Export Council. Other markets in Asia, such as Japan and Singapore, have also been strong markets for poultry products, importing both chicken broilers and chicken feet. But during 1997, a number of factors, including the Asian financial crisis, began to take a toll on these markets.

According to James Sumner, president of the USA Poultry and Egg Export Council, "In 1997, Hong Kong, which is the largest Asian market for poultry, reverted to China. Before that occurred, many importers in Hong Kong began to reduce their poultry orders. Then, starting midyear, the financial crisis began to impact the level of exports to Hong Kong and other Asian nations. Finally, in the fall, the Hong Kong bird flu broke out, and many people there stopped buying chickens altogether."

Thus, poultry inventories in Hong Kong swelled and prices fell. All of these factors, according to Sumner, made a difficult situation worse. To complicate matters, Thailand, one of the biggest poultry producers in Asia, experienced a substantial decline in its currency and began to export most of its broiler production to other Asian nations at prices substantially lower than those for American broilers. As a result, U.S. poultry producers had to compete by lowering their prices. The long-term effects on the poultry market are not clear at this time, but in the short term exports have declined and prices may decline further.

What About Consumers?

Beyond its impact on businesses, the Asian financial crisis will certainly affect consumers — mostly in positive ways.

While businesses and some individual investors may feel the pinch from the recent Asian financial turmoil, consumers ultimately may find that the crisis allows them to buy many products — like televisions, computers and apparel — at lower prices, particularly if Asian manufacturers drop their prices. Initial data indicate that prices will fall as a result of the crisis. In January the price of imports into the United States dropped 1.3 percent as the cost of goods from Asia and elsewhere fell, according to the U.S. Department of Labor.

But will consumers receive all of the benefits from the lower-cost Asian products? According to Cunningham, "While a portion of those lower prices may be passed along to the consumer, there is mixed evidence on import price pass-through effects. As a result, consumers may not notice a substantial reduction in prices."

And while more Asian products may translate to cheaper prices, which are good for consumers, they will also probably increase the U.S. trade deficit, which is expected to climb by some estimates as much as 35 percent in 1998, translating into a modest impact on the U.S. economy this year.

No Crisis Here

While international economies are linked much more closely today than ever before, financial crises throughout the world do not necessarily have significant spillover effects throughout every market. Although the United States and the Southeast will clearly feel some of the turbulence from the Asian financial crisis, at this point the specific effects are unknown. Based on the Southeast's export mix, however, the states in the region overall should expect continued growth for the year, although less than originally anticipated.