Have U.S. stocks caught Asian flu? Economic turmoil may prove deadly to U.S. or be mild

October 29, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

Two weeks ago Steve Hanke stood at the East Asia Economic Summit in Hong Kong and predicted, in certain terms, that the region's troubles would wash to the West and drown the U.S. stock market.

"There is only one way for the Dow to break, and that is down," Hanke, an economics professor at the Johns Hopkins University, said in a paper delivered at the summit Oct. 13.

Steep Asian currency devaluations and backfiring Asian economies, he argued, would "send shock waves through the global capital markets."

Flush with cheap goods and underused factories, Asian countries would try to export their way from trouble and would carve into the profits of their competitors in the rest of the world.

The professor gained some disciples this week. As he spoke in Hong Kong, the Dow Jones industrial average stood at 8,045. Yesterday it closed at 7,498, after partially recovering from an even steeper drop to 7,161 on Monday.

Profit panic is at the gut of the stock market's problems. And the terms of the debate over stocks' future pivot on whether analysts think it is merited.

On one side are people like Hanke, who believe that cheaper currencies will make tough Asian competitors even tougher, with baleful results for American firms.

"Their warehouses are bulging with inventories," he said in an interview. "Now they've got cheap currencies. We're going to see a situation where U.S. companies have virtually no power to increase their prices" and will have their costs boosted by tight U.S. labor markets, too.

On the other side are people who acknowledge that Asian problems affect the United States but who think the damage will be minor.

"Trade directly affects a relatively modest fraction of the U.S. economy," said William Lewis, director of the McKinsey Global Institute in Washington.

About half the U.S. manufacturing sector competes worldwide against overseas companies, he said, "and the manufacturing sector is only a quarter of the economy, so we're really talking only about 10 or 15 percent being affected."

But economies are never simple, and the effects of the Asian problems don't fall just one way.

Many U.S. companies have branches in Asia that export from those countries to the rest of the world.

Because of the local currency declines, those units "are going to see their bottom lines helped," said Nariman Behravesh, chief international economist for Standard & Poor's DRI in Boston. "If you're producing in Thailand for export out of Thailand to other parts of the world, your costs in Thai bahts just went down."

Businesses that are selling into Asia are going to get "clobbered," he said. But the overall economic effects on this country will not be severe, he added.

Two Maryland companies demonstrate the opposing sides of the debate.

Effects on McCormick

McCormick & Co. Inc., the giant spice supplier, depends heavily on Indonesia for stocks of black pepper, white pepper, cinnamon, nutmeg and mace. The Indonesian rupiah has plunged by nearly half against the U.S. dollar since last summer, generating bargain spice prices.

As a result, in cinnamon, "prices are reaching levels that we haven't seen in years," said Al Goetze, McCormick's vice president of spice procurement.

In some other spices, however, unusual weather has raised the local cost and wiped out some of the currency gains, Goetze said.

Aerospace contractor Lockheed Martin Corp. on the other hand, TC sells U.S.-made planes and other products to Asian buyers, especially Singapore and Australia.

"Few, if any, near-term programs that we are involved in will be affected" by the crisis, said spokesman Keith Mordoff. However, he added:

"We're analyzing what effect there will be on future programs that we might be interested in competing for."

The Asian currency turmoil started in Thailand last spring and spread to Malaysia, the Philippines and other developing "tiger" countries. The Japanese yen has also been depreciating against the U.S. dollar, but so far the Hong Kong dollar and the Chinese yuan have held their value.

Hanke, who has advised monetary authorities in many developing countries, argues that tenacious deflation has gripped Asia, as evidenced by recent plunges in stock and real estate prices, and is spreading here. "The bottom line is that these [U.S. corporate] profit margins are going to come in a lot smaller than everyone has projected," he said.

Healthy economy

Optimists, however, point to the apparent overall health of the U.S. economy, now in its seventh straight year of growth.

"The fundamentals of the U.S. economy have not changed just because investors value things today differently than they did yesterday," said McKinsey's Lewis.

True, a flood of cheap imports will hurt the country's trade deficit. But they'll also help hold down inflation, which will keep interest rates low, which in turn could help corporate profits and stock values.

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