Sober thoughts

From: Yakov Horenstein (
Date: Thu Feb 04 1999 - 13:41:11 EET

Manufacturing Weakness May Dim "Sparkling" U.S. Economy

By Jim Forest
BOSTON, Jan. 25 (Standard & Poor's)

It's easy to take a rose-colored view of the state of the U.S. economy.
Incomes are up, the unemployment rate is at a 43-year low, consumers
continue to spend on big-ticket items such as automobiles, and inflation
has been virtually nonexistent. Even Federal Reserve Chairman Alan
Greenspan has even referred to the economy as "sparkling."

But in the fallout from the 1997-98 Asian currency collapse, the U.S.
economy has not emerged unscathed. In fact, we have seen the Asian
contagion spread to the U.S. manufacturing sector by way of diminished
international trade. The question remains: is the U.S. economy strong
enough to fight off this infection?

Manufacturing downturn has an Asian flavor

To make that determination we must take a hard look at the data we have so
far. Leading indicators, including the National Association of Purchasing
Managers index, continue to show broad-based manufacturing sector
deterioration. In January 1998, the index revealed contractionary readings
(below 50%) in both its export and price components. Since then we have
seen a more pronounced downturn.

Last June, the index fell below the 50.0% threshold after showing
decreasing rates of growth since the Asian crisis first hit in October of
1997. In the past three months, the numbers deteriorated significantly. In
October, only the production component of the index was in positive
territory at 52.6%. December's report showed across-the-board weakness --
contractionary readings in each of the eight major categories.
Interestingly, however, an NAPM spokesperson indicated that these numbers
should be bottoming out.

The view from S&P DRI

While economists associated with the survey seem to feel that we have hit
rock bottom, others think that it's too early to tell. David Wyss, chief
economist for Standard & Poor's DRI, feels that there is still room to
fall. According to Wyss, "Things are continuing to deteriorate in this
sector. There are some signs of stabilization but we believe it will
continue to deteriorate-- perhaps at a slower rate. It is clear, however,
that we're losing manufacturing jobs due to slower exports."

Wyss considers the employment effect of the manufacturing sector slowdown
particularly disheartening because for many it hits close to home. He says,
"People should already be noticing [Asia's impact], because we're seeing a
lot of layoffs." Wyss notes that the reason that the manufacturing layoffs
have been downplayed in the headlines is because the jobs data have been
boosted by strength in the non-manufacturing sector. But just because the
unemployment rate is at its lowest level in a generation doesn't mean that
layoffs aren't hitting the workforce hard.

Manufacturing hurting like the dickens

Thus, for the U.S. economy it's the best of times and the worst of times.
The worst part has to do with the manufacturing sector. The manufacturing
slowdown has resulted in the loss of 250,000 jobs since March. While the
global economic turmoil has resulted in difficulties here at home, there is
a bright side.

Fortunately, the economy has created to 2.5 million non-manufacturing jobs,
so displaced workers are not facing the type of job market that they would
have seen during the 1990-91 recession. Another silver lining is the fact
that manufacturing weakness has kept inflation in check.

Prices continue to contract rapidly in the manufacturing sector, providing
a cushion to consumers at a time when labor tightness appeared to be
threatening. In fact, the tame level of inflation has helped to keep
interest rates low and has fueled the economic expansion.

The road ahead: Brazil is the key

Looking ahead, it is too early to tell if the spread of international
economic difficulties will result in a recession in the U.S. Wyss says, "By
itself, the devaluation of the Brazilian real is not a big deal. But it is
a big deal if Brazil is just the first in a new set of dominoes. To me it
looks to be controlled but
again, watch this space. It could get worse."

So, in the meantime, perhaps we should be glad that it is thus far it is
only the manufacturing sector of the U.S. economy that is losing its

Copyright 1999 Standard & Poor's.

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