Speech

The International Connection: The Asian Crisis and U.S. Economic Activity NoondayClubMeeting St.Louis,Missouri December2,1999 The East Asian crisis, which broke open hasprobablycontributedtothehigherU.S.infla- inthesummerof1997,focusedattention tionthisyearcomparedtolastyear. on the international economic relation- Beforeproceedingtoelaborateonmymajor ships of the U.S. economy, especially themes,Iwanttoemphasizethatmyremarks those with the crisis countries. The Asian shock reflectmyownviewsanddonotnecessarily to the world economy set in motion numerous reflectofficialpositionsoftheFederalReserve changes—some favorable, some unfavorable to System.IparticularlywanttothankCletus U.S. economic activity. Correspondingly, the Coughlin,vicepresidentattheSt.LouisFed,who recovery in East Asia, which began in earnest isaco-authoroftheseremarks.However,Iretain earlier this year and will almost certainly con- fullresponsibilityforerrors. tinuenextyear,shouldreversemanyoftheearlier changes. However, some changes will be perma- nent—mostlyhealthychanges,Iampleasedtosay. EAST ASIA AND ITS EFFECTS ON InmyremarksthismorningIplantostress U.S. TRADE threethemes.First,tounderstandtheAsiancrisis anditsaftermath,theanalystmustlookatmuch Tosetthestageformydiscussion,letmehigh- morethanexportsandimportsofgoodsandserv- lightafewfactsabouttheAsiancrisis.Economic ices.Clearly,thetradechannelisimportant,but performancethroughoutmostofAsiawasquite areviewofrecenthistoryrevealsthattheAsian strongduringthe1990suntilthelatterhalfof crisissetinmotionnumerouschanges,someof 1997.Propelledbyfavorableeconomicconditions whichoffsetthenegativeimpactsofreduced suchaspolicychangesandtechnologicaldevelop- exportstoEastAsia.Mysecondthemeisthatthe ments,privatecapitalflowedintoAsiatotake declineinU.S.exportscausedbythecrisiswas advantageofwhatappearedtobeanincreasingly arelativedemandshockratherthananaggregate attractiveinvestmentclimate.However,inthe demandshock.Thatis,theshockhadmixed latterhalfof1997,investorsentimentforEast effectsonU.S.employmentandeconomicactivity, Asiaswitchedfrombeingverypositivetovery depressingsomesectorsandstimulatingother negative.Consequently,investorsreversedthe sectors.Asafirstapproximation,thesumofthese flowofcapitalfromintotooutofthesecountries. sector-specificeffects—theaggregateortotal ThefiveeconomiesmostaffectedbytheAsian economyeffect—wasawash.Bythesametoken, crisis—Indonesia,Philippines,Malaysia,Korea, recoveryinAsiawillalsoappearprimarilyasa andThailand—hadprivatecapitalinflowsof relativedemandshock,stimulatingoutputin $93billionin1996andoutflowsof$12billion somesectorsanddepressingitinothersectors. in1997.Moreover,theforeignexchangevalues Third,withrespecttoinflation,theAsiancrisis ofthesecountries’currenciesandtheirstockmar- likelyreducedU.S.inflationin1998;therecovery ketssufferedsharpdeclines.Notsurprisingly, 1 INTERNATIONALTRADEANDFINANCE economicactivityinmostEastAsiancountries importantproductcategories.Exportsaccounted declinedbetween1997and1998. for12percentofMissouri’schemicalproducts Manyforecastersinitiallypredictedthatthe productionand10percentofitsindustrial AsiancrisiswouldhaveachillingeffectonU.S. machineryproduction. growth.Theirthinkingwasthattherecessions DespiteJapan’simportanceasanAsianexport inEastAsiawouldreducethedemandforU.S. destination,otherforeigndestinations—Canada exportsandthatthisexportshockwouldpropa- andMexico,forexample—arefarmoreimportant gateitselfintoasubstantialreductionindemand forMissouri’sexporters.During1996and1997, forU.S.production. Japanreceivedroughly5percentofexportsfrom Partoftheirthinkingwasbasedontheincreas- Missouri.Meanwhile,Mexicowasthedestination ingimportanceofinternationaltrade,especially for8percentandCanadaforamuchlarger42 exportstoEastAsia,fortheU.S.economy.In1997, percent.Clearly,thedirecttradeeffectoftheAsian totalexportsofgoodsandserviceswere11.9per- crisisonMissourimanufacturingfirmsasawhole centofU.S.grossdomesticproduct(GDP).By wasfairlysmallalthough,obviously,theeffects comparison,in1960,thissharewasonly4.8per- mightbewellaboveaverageforcertainfirms. cent.Between1991and1998,risingexportswere Between1997and1998,U.S.manufacturing akeyfactorpropellingtheexpansionoftheU.S. exportstoEastAsiadeclinedby12percent.The economy.Moreover,inlightoftherapidgrowth exportdeclineexperiencedbyMissouri’smanu- inEastAsiaduringthe1990s,anincreasingshare facturersmirroredthenationaldecline,falling ofU.S.exportswasbeingsenttoEastAsia.Prior by13percent.Thesedeclinesexplaintoalarge tothecrisis,roughly30percentofU.S.exports degreetheweaknessinU.S.exportgrowthduring weredestinedforEastAsia. 1998.Infact,fromDecember1997toDecember Asnationalforecastersbegan,aftermid-1997, 1998,U.S.exportsofgoodsandservicesfellby toassessthepotentialconsequencesoftheAsian 1.8percent;meanwhile,importswerecontinuing crisisfortheU.S.economy,regionalforecasters toincrease.Consequently,theU.S.tradedeficit begantodothesamefortheirownareas.Asour ballooned,increasingfrom$105billionforthe regionaleconomistsattheSt.LouisFedstudied 12monthsendingDecember1997to$164billion thesituation,itbecameapparentthatthemarkets forthe12monthsendingDecember1998.The ofEastAsiaarelessimportantformanufacturing percentagedeclineinexportsandthesizeofthe firmsinMissourithantheyareformanufacturing tradedeficitareevenlargerifonerestrictsthe exportersintheUnitedStatesgenerally.Inreal,or focustotradeingoods. inflation-adjusted,terms,during1997,Missouri DespitemanyforecaststhattheAsiancrisis sent14percentofitsmanufacturedexportstoEast wouldhaveachillingeffectonU.S.growth,it Asia,roughlyhalftheU.S.average.Asageneral appearsthatthecrisishadlittleeffectonthe rule,statesinthewesternUnitedStateshave growthofU.S.GDPoremploymentineitherthe strongertradelinkswithAsiathandootherstates. UnitedStatesorMissouri.Howcanitbethatthe Japanisthemostimportantexportdestina- U.S.economywasabletoshrugoffsuchalarge tionforMissouri’smanufacturedexports.About lossofbusiness? 30percentofMissouri’smanufacturedexports Let’sreviewafewmacroeconomicfacts.First, aredestinedforJapan;Koreaisthenextimportant theU.S.economyhasbeengrowingrapidlyin destinationwith16percent.Intermsofproduct recentyears.U.S.GDPexpandedby4.3percent categories,Missouri’sexportsareconcentrated betweenthefourthquarterof1996andthefourth intransportationequipment,primarilyaircraft. quarterof1997,andby4.6percentbetweenthe During1996and1997,over42percentof fourthquartersof1997and1998.Growthactually Missouri’sexportstoEastAsiaweretransporta- roseabitin1998over1997;aslowingassociated tionequipment.Exportsofchemicalproducts withtheAsiancrisisiscertainlynotobvious.A andindustrialmachinerywerethenextmost similarconclusionissupportedbylookingat 2 TheInternationalConnection:TheAsianCrisisandU.S.EconomicActivity employmentgrowth,unemploymentrates,and ontheeconomywasnoticedprimarilyonlyby manyotherindicatorsoftheaggregateeconomy. economistsandthefirmsdirectlyaffected. Considertheemploymentnumbersfor Whydiddomesticdemandgrowsostrongly? Missouri.ComparingDecember1997with OnereasonisthattheAsiancrisisactuallyhelped December1996,payrollemploymentincreased boostdomesticdemand.Oneeffectarosefrom by2.6percent,whilefromDecember1997to thereallocationofinternationalcapitalflowsfrom December1998employmentgrew1.9percent. EastAsiatoelsewhere,withtheUnitedStates Thisslowingofemploymentgrowth,however, beingtheprimaryelsewhere.Thereallocationof likelyreflectedascarcityofworkersratherthan capitalputdownwardpressureoninterestrates anAsianeffect;Missouri’sunemploymentrate intheUnitedStatesaswellasupwardpressure declinedfrom4.5percentinDecember1997to onU.S.equityprices. 3.2percentinDecember1998. Lowerinterestratestendtostimulatespend- ingoninterest-ratesensitivegoods,suchasauto- mobilesandnewhomes.TheUnitedStatesdid A GENERAL EQUILIBRIUM indeedenjoyboomsinboththesesectors.Also, risingequitypricestendtostimulatespending PERSPECTIVE ashouseholdsbecomewealthier.Thus,whileU.S. So,backtothemainquestion:whydidn’tthe exportdemandwasdecliningduetoreduced Asiancrisiscausearecessionor,atleast,amajor demandinAsia,thisreductionindemandwas slowdownintheUnitedStates? beingoffsetbyincreasedspendingbyhouseholds First,thesizeoftheexportdemandshock andbusinessesintheUnitedStates. wasrelativelysmall.Recallthatthedemand Anotherpartoftheexplanationisthatreduced declineinvolvedaportionofarelativelysmall demandinAsiatendedtoreducecommodity sectoroftheU.S.economy.Thatis,despitethe prices.Ofcourse,reduceddemandinAsiawas sharpincreaseintheimportanceoftradetothe onlyoneofanumberoffactorsputtingdownward U.S.economyinthepast40years,mostofwhat pressureoncommodityprices.Generallyspeak- weproduceisstillboughtdomestically.Tounder- ing—andIwanttostress“generallyspeaking”— standthispointbetter,let’stakealookatsome thisreduceddemandgeneratedbeneficialeffects numbers.Asnotedpreviously,U.S.realmerchan- fortheU.S.economy.Inparticular,theAsiancrisis diseexportstoEastAsiafellby12percentduring contributedtoadeclineinoilprices.Clearly, 1998.EastAsianeconomiesaccountedforabout decliningoilpricesadverselyaffectedU.S.oil 30percentofU.S.exports.Giventhismarketshare, producersandthosesupplyinginputstotheoil theAsianimpactwastoreduceU.S.merchandise productionindustry.However,onnet,sincethe exportsby4percent,absentanychangesinexport UnitedStatesimportsalargepercentageofitsoil, saleselsewhere.Becausemerchandiseexports theUnitedStatesasawholetendedtobenefit. accountforroughly10percentofU.S.output,the Obviously,youandIbenefitedfromlowergaso- 4percentdeclineinexportswouldhaveresulted lineprices,whichenabledustospendonother ina0.4percentdeclineintotalU.S.output,absent goodswhatwesavedongas.Moreover,U.S.firms, anychangesindomesticdemand.Whilesucha suchasthoseintheairlineindustry,paidlower declineisnottrivial,itismuchsmallerthanthe pricesforenergyandsomeofthesesavingswere declinethatwouldhaveresultedfromasimilar passedontoU.S.consumers,whointurnspent percentagedropindomesticdemand.U.S.export thesavingsonothergoods. businesstoEastAsiaisasmalltailonalargedog, Tosummarizetheanalysisoftheeffectsof anditdoesn’tmakesensetobelievethatthislittle theAsiancrisisonU.S.outputandemployment, tailcouldwagthedog. thecrisissimultaneouslydepressedsomeexport Moreover,domesticdemandwasnotstagnant. industriesandstimulatedindustriesresponsive Indeed,itgrewsostronglythattheexportdrag tolowercommoditypricesandlowerinterest 3 INTERNATIONALTRADEANDFINANCE rates.Thus,Asiacreatedarelativedemanddis- CONSEQUENCES OF THE turbance,depressingsomeindustriesandstimu- RECOVERY IN ASIA latingothers,withasmallaggregateeffect. I’vediscussedthedemandeffectsoflower ThedowndraftstageoftheAsiancrisisispast, commodityprices,buttheeffectsonoverallinfla- andtodaywearewitnessingtherecoverystage. tionarealsoofinterest.Mostanalystsbelieve— Mycommentsconcerningtheconsequencesfor andIsharethebelief—thatlowercommodity theU.S.economyoftherecoveryinAsiafollow directlyfrommypreviouscommentsaboutthe priceswerenotoffsetbyhigherpriceselsewhere consequencesoftheAsiancrisis.Simplyreverse intheeconomy.Thus,lowercommodityprices thedirectionofthechange—“increase”becomes contributedtokeepingoverallinflationlower “decrease”and“decrease”becomes“increase.” thanitmightotherwisehavebeenin1998.Iwould RecoveryisindeedunderwayinAsia.Idonot beremiss,however,ifIdidnotstressthatulti- wanttodelugeyouwithnumbers,butIwould matelyinflationistiedtomonetarypolicyrather liketoreciteafewfiguresfromtheInternational thantotemporaryshockstosupplyordemand. MonetaryFund.HerearethegrowthratesforGDP Suggestiveevidenceonmyassertionconcern- forafewcountries: ingtheshort-runeffectsofcommoditypriceson overallinflationisprovidedbyexaminingrecent Forecast(percent) changesinconsumerprices.Overthe12months endingDecember1998,theconsumerpriceindex 1997 1998 1999 rose1.6percent.Overthesameperiod,theso- Thailand –1.3 –9.4 9;4.0 called“core”consumerpriceindex,which Indonesia 4.8 –13.7 –0.8 excludesfoodandenergyprices,rose2.5per- Korea 5.0 –5.9 6.5 cent.Thus,totheextenttheAsiancrisistended Malaysia 7.7 –6.7 2.4 todepressfoodandenergyprices,measured Philippines 5.2 –0.5 2.2 inflationin1998waslowerthanitwouldhave beenotherwise. Inaddition,withtheexceptionofKorea, Inadditiontothedeclinesinenergyandother whichisexpectedtogrowataslightlyslower commodityprices,therewasoneotherfactor rate,thesecountriesareexpectedtogrowatleast associatedwiththeAsiancrisisthattendedto asfastduring2000asin1999. holddowninflation.AsImentionedearlier,the AsAsiarecovers,weshouldseethereversal foreignexchangevalueofmanyAsiancurren- ofcapitalflows—financialcapitalshouldbegin ciesdeclinedinvaluerelativetothedollar.The toflowintothispartoftheworldratherthanout appreciationofthedollartendedtoholddown ofit.Thisreversalmayhavesomethingtodowith and,insomecases,ledtoactualdeclinesinthe theupwardpressureoninterestratesintheUnited pricesofgoodsimportedintotheUnitedStates. Statesthisyear.Thehigherrateshaveclearly Consequently,thepricesofimportedgoods,as takenhousingconstructiondownabitfromits wellasthepricesofcompetitivegoodsproduced peak,andmaywellbeslowingautomobile intheUnitedStates,weretemporarilylowerthan demandabit.Iflong-terminterestratesremain theymighthavebeenotherwise. atcurrentlevels,wemayseesomewhatbroader Beforeleavingthissectionofmyremarks,I effectsincomingmonths. wouldliketoreiteratethatthereductionincom- Anobviousconsequenceofexpandedeco- modityprices,whilelikelybeneficialonnet,was nomicactivityinAsiafortheUnitedStatesshould notbeneficialtoeveryone.TheAsiancrisishas beincreaseddemandforU.S.exportsand,thus, hurtmany—perhapsmost—producersofagri- increasedexportshipmentsfromtheUnited culturalcommoditiesbecausetheirpriceshave States.Basedonthemostrecentdata,U.S.exports beensoweak. toEastAsiahavenotyetreturnedto1997levels. 4 TheInternationalConnection:TheAsianCrisisandU.S.EconomicActivity However,exportstoEastAsiadidincreaseduring UnitedStates,andhaveemphasizedthatthose thesecondandthirdquartersofthisyear,an effectsgowellbeyondthesurfaceeffectsonU.S. obviouslypositivedevelopmentfortheU.S. exports.Despitesubstantialtradeeffectsforthe exportsector. UnitedStatesgenerallyaswellasformany Asimilarcommentappliestoexportsby Missouriexporters,thecrisishadminimal Missourimanufacturers.Exports,eventhough aggregateeffectsonU.S.economicoutputand stillbelow1997levels,arebeginningtoincrease. employment. InacommentechoedbyanumberofMissouri Theinflationstoryisabitdifferent.Arguably, manufacturers,alocalmanufacturerreportedto thelargestmacroeconomiceffectofthecrisiswas usthathisfirm’ssalestoEastAsiadriedupfor tolowerU.S.inflationin1998.Thedeclinewas 18to20months.Onlyinthepastsixmonthshas temporary;recoveryinAsiatemporarilyraised hiscompanybeguntoreceiveorders. U.S.inflation,accountingforsomeandperhaps Wearealsoseeingrisingoilprices,withthe mostoftheincreaseintheU.S.CPIin1999.Based priceofabarrelofoildoublingoverthelastyear. oncurrentforecasts,I’mguessingthattheAsian Iwouldliketostress,however,thatmanyfactors recoverywillcontinueandthatAsia’sroleinthe arecontributingtorisingoilprices—therecovery U.S.economywillrevert,moreorless,totherole inAsiaissimplyone.Incontrasttotheearlier itplayedintheyearsbeforethecrisis. period,wearenowseeingtheconsumerprice Myremarksthismorninghavefocusedon index(CPI)riseatafasterratethanthecoreCPI. theshort-termeffectsoftheAsiancrisisandits Overthe12monthsendingOctober1999,the aftermath.ThefactthattheU.S.macroeconomy CPIrose2.6percent,whilethecoreCPIrose2.1 hasnotbeenadverselyaffectedbytheAsiancrisis percent. doesnotmeanweareunaffectedinthelongrun Thebottomlineisthatincomingquarters bythehealthofEastAsia.Astrongandrapidly demandforU.S.productionshouldshiftsome- growingEastAsiawillcontributetoahealthy whatfromconsumptionandinvestmentto U.S.economy.Weshouldwelcomeprosperity exports.Thisshiftshouldhaveminimaleffects abroad,andneverfearit.Andweshouldpursue onthelevelofmacroeconomicactivityinthe everyopportunitytostrengthentraderelations. UnitedStates. Doingsowillstrengthenourprosperity,andthat ofourtradingpartners. CONCLUSION I’venotattemptedtoidentifythecauseofthe Asiancrisis;that’sasubjectforanotherday.I’ve concentratedontheeffectsofthecrisisonthe 5

William Poole (1999, December 1). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19991202_poole

@misc{wtfs_speech_19991202_poole,
  author = {William Poole},
  title = {Speech},
  year = {1999},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19991202_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}