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The International Connection:
The Asian Crisis and U.S. Economic Activity
Noonday Club Meeting
St. Louis, Missouri
December 2, 1999


he East Asian crisis, which broke open
in the summer of 1997, focused attention
on the international economic relationships of the U.S. economy, especially
those with the crisis countries. The Asian shock
to the world economy set in motion numerous
changes—some favorable, some unfavorable to
U.S. economic activity. Correspondingly, the
recovery in East Asia, which began in earnest
earlier this year and will almost certainly continue next year, should reverse many of the earlier
changes. However, some changes will be permanent—mostly healthy changes, I am pleased to say.
In my remarks this morning I plan to stress
three themes. First, to understand the Asian crisis
and its aftermath, the analyst must look at much
more than exports and imports of goods and services. Clearly, the trade channel is important, but
a review of recent history reveals that the Asian
crisis set in motion numerous changes, some of
which offset the negative impacts of reduced
exports to East Asia. My second theme is that the
decline in U.S. exports caused by the crisis was
a relative demand shock rather than an aggregate
demand shock. That is, the shock had mixed
effects on U.S. employment and economic activity,
depressing some sectors and stimulating other
sectors. As a first approximation, the sum of these
sector-specific effects—the aggregate or total
economy effect—was a wash. By the same token,
recovery in Asia will also appear primarily as a
relative demand shock, stimulating output in
some sectors and depressing it in other sectors.
Third, with respect to inflation, the Asian crisis
likely reduced U.S. inflation in 1998; the recovery

has probably contributed to the higher U.S. inflation this year compared to last year.
Before proceeding to elaborate on my major
themes, I want to emphasize that my remarks
reflect my own views and do not necessarily
reflect official positions of the Federal Reserve
System. I particularly want to thank Cletus
Coughlin, vice president at the St. Louis Fed, who
is a co-author of these remarks. However, I retain
full responsibility for errors.

To set the stage for my discussion, let me highlight a few facts about the Asian crisis. Economic
performance throughout most of Asia was quite
strong during the 1990s until the latter half of
1997. Propelled by favorable economic conditions
such as policy changes and technological developments, private capital flowed into Asia to take
advantage of what appeared to be an increasingly
attractive investment climate. However, in the
latter half of 1997, investor sentiment for East
Asia switched from being very positive to very
negative. Consequently, investors reversed the
flow of capital from into to out of these countries.
The five economies most affected by the Asian
crisis—Indonesia, Philippines, Malaysia, Korea,
and Thailand—had private capital inflows of
$93 billion in 1996 and outflows of $12 billion
in 1997. Moreover, the foreign exchange values
of these countries’ currencies and their stock markets suffered sharp declines. Not surprisingly,


economic activity in most East Asian countries
declined between 1997 and 1998.
Many forecasters initially predicted that the
Asian crisis would have a chilling effect on U.S.
growth. Their thinking was that the recessions
in East Asia would reduce the demand for U.S.
exports and that this export shock would propagate itself into a substantial reduction in demand
for U.S. production.
Part of their thinking was based on the increasing importance of international trade, especially
exports to East Asia, for the U.S. economy. In 1997,
total exports of goods and services were 11.9 percent of U.S. gross domestic product (GDP). By
comparison, in 1960, this share was only 4.8 percent. Between 1991 and 1998, rising exports were
a key factor propelling the expansion of the U.S.
economy. Moreover, in light of the rapid growth
in East Asia during the 1990s, an increasing share
of U.S. exports was being sent to East Asia. Prior
to the crisis, roughly 30 percent of U.S. exports
were destined for East Asia.
As national forecasters began, after mid-1997,
to assess the potential consequences of the Asian
crisis for the U.S. economy, regional forecasters
began to do the same for their own areas. As our
regional economists at the St. Louis Fed studied
the situation, it became apparent that the markets
of East Asia are less important for manufacturing
firms in Missouri than they are for manufacturing
exporters in the United States generally. In real, or
inflation-adjusted, terms, during 1997, Missouri
sent 14 percent of its manufactured exports to East
Asia, roughly half the U.S. average. As a general
rule, states in the western United States have
stronger trade links with Asia than do other states.
Japan is the most important export destination for Missouri’s manufactured exports. About
30 percent of Missouri’s manufactured exports
are destined for Japan; Korea is the next important
destination with 16 percent. In terms of product
categories, Missouri’s exports are concentrated
in transportation equipment, primarily aircraft.
During 1996 and 1997, over 42 percent of
Missouri’s exports to East Asia were transportation equipment. Exports of chemical products
and industrial machinery were the next most

important product categories. Exports accounted
for 12 percent of Missouri’s chemical products
production and 10 percent of its industrial
machinery production.
Despite Japan’s importance as an Asian export
destination, other foreign destinations—Canada
and Mexico, for example—are far more important
for Missouri’s exporters. During 1996 and 1997,
Japan received roughly 5 percent of exports from
Missouri. Meanwhile, Mexico was the destination
for 8 percent and Canada for a much larger 42
percent. Clearly, the direct trade effect of the Asian
crisis on Missouri manufacturing firms as a whole
was fairly small although, obviously, the effects
might be well above average for certain firms.
Between 1997 and 1998, U.S. manufacturing
exports to East Asia declined by 12 percent. The
export decline experienced by Missouri’s manufacturers mirrored the national decline, falling
by 13 percent. These declines explain to a large
degree the weakness in U.S. export growth during
1998. In fact, from December 1997 to December
1998, U.S. exports of goods and services fell by
1.8 percent; meanwhile, imports were continuing
to increase. Consequently, the U.S. trade deficit
ballooned, increasing from $105 billion for the
12 months ending December 1997 to $164 billion
for the 12 months ending December 1998. The
percentage decline in exports and the size of the
trade deficit are even larger if one restricts the
focus to trade in goods.
Despite many forecasts that the Asian crisis
would have a chilling effect on U.S. growth, it
appears that the crisis had little effect on the
growth of U.S. GDP or employment in either the
United States or Missouri. How can it be that the
U.S. economy was able to shrug off such a large
loss of business?
Let’s review a few macroeconomic facts. First,
the U.S. economy has been growing rapidly in
recent years. U.S. GDP expanded by 4.3 percent
between the fourth quarter of 1996 and the fourth
quarter of 1997, and by 4.6 percent between the
fourth quarters of 1997 and 1998. Growth actually
rose a bit in 1998 over 1997; a slowing associated
with the Asian crisis is certainly not obvious. A
similar conclusion is supported by looking at

The International Connection: The Asian Crisis and U.S. Economic Activity

employment growth, unemployment rates, and
many other indicators of the aggregate economy.
Consider the employment numbers for
Missouri. Comparing December 1997 with
December 1996, payroll employment increased
by 2.6 percent, while from December 1997 to
December 1998 employment grew 1.9 percent.
This slowing of employment growth, however,
likely reflected a scarcity of workers rather than
an Asian effect; Missouri’s unemployment rate
declined from 4.5 percent in December 1997 to
3.2 percent in December 1998.

So, back to the main question: why didn’t the
Asian crisis cause a recession or, at least, a major
slowdown in the United States?
First, the size of the export demand shock
was relatively small. Recall that the demand
decline involved a portion of a relatively small
sector of the U.S. economy. That is, despite the
sharp increase in the importance of trade to the
U.S. economy in the past 40 years, most of what
we produce is still bought domestically. To understand this point better, let’s take a look at some
numbers. As noted previously, U.S. real merchandise exports to East Asia fell by 12 percent during
1998. East Asian economies accounted for about
30 percent of U.S. exports. Given this market share,
the Asian impact was to reduce U.S. merchandise
exports by 4 percent, absent any changes in export
sales elsewhere. Because merchandise exports
account for roughly 10 percent of U.S. output, the
4 percent decline in exports would have resulted
in a 0.4 percent decline in total U.S. output, absent
any changes in domestic demand. While such a
decline is not trivial, it is much smaller than the
decline that would have resulted from a similar
percentage drop in domestic demand. U.S. export
business to East Asia is a small tail on a large dog,
and it doesn’t make sense to believe that this little
tail could wag the dog.
Moreover, domestic demand was not stagnant.
Indeed, it grew so strongly that the export drag

on the economy was noticed primarily only by
economists and the firms directly affected.
Why did domestic demand grow so strongly?
One reason is that the Asian crisis actually helped
boost domestic demand. One effect arose from
the reallocation of international capital flows from
East Asia to elsewhere, with the United States
being the primary elsewhere. The reallocation of
capital put downward pressure on interest rates
in the United States as well as upward pressure
on U.S. equity prices.
Lower interest rates tend to stimulate spending on interest-rate sensitive goods, such as automobiles and new homes. The United States did
indeed enjoy booms in both these sectors. Also,
rising equity prices tend to stimulate spending
as households become wealthier. Thus, while U.S.
export demand was declining due to reduced
demand in Asia, this reduction in demand was
being offset by increased spending by households
and businesses in the United States.
Another part of the explanation is that reduced
demand in Asia tended to reduce commodity
prices. Of course, reduced demand in Asia was
only one of a number of factors putting downward
pressure on commodity prices. Generally speaking—and I want to stress “generally speaking”—
this reduced demand generated beneficial effects
for the U.S. economy. In particular, the Asian crisis
contributed to a decline in oil prices. Clearly,
declining oil prices adversely affected U.S. oil
producers and those supplying inputs to the oil
production industry. However, on net, since the
United States imports a large percentage of its oil,
the United States as a whole tended to benefit.
Obviously, you and I benefited from lower gasoline prices, which enabled us to spend on other
goods what we saved on gas. Moreover, U.S. firms,
such as those in the airline industry, paid lower
prices for energy and some of these savings were
passed on to U.S. consumers, who in turn spent
the savings on other goods.
To summarize the analysis of the effects of
the Asian crisis on U.S. output and employment,
the crisis simultaneously depressed some export
industries and stimulated industries responsive
to lower commodity prices and lower interest


rates. Thus, Asia created a relative demand disturbance, depressing some industries and stimulating others, with a small aggregate effect.
I’ve discussed the demand effects of lower
commodity prices, but the effects on overall inflation are also of interest. Most analysts believe—
and I share the belief—that lower commodity
prices were not offset by higher prices elsewhere
in the economy. Thus, lower commodity prices
contributed to keeping overall inflation lower
than it might otherwise have been in 1998. I would
be remiss, however, if I did not stress that ultimately inflation is tied to monetary policy rather
than to temporary shocks to supply or demand.
Suggestive evidence on my assertion concerning the short-run effects of commodity prices on
overall inflation is provided by examining recent
changes in consumer prices. Over the 12 months
ending December 1998, the consumer price index
rose 1.6 percent. Over the same period, the socalled “core” consumer price index, which
excludes food and energy prices, rose 2.5 percent. Thus, to the extent the Asian crisis tended
to depress food and energy prices, measured
inflation in 1998 was lower than it would have
been otherwise.
In addition to the declines in energy and other
commodity prices, there was one other factor
associated with the Asian crisis that tended to
hold down inflation. As I mentioned earlier, the
foreign exchange value of many Asian currencies declined in value relative to the dollar. The
appreciation of the dollar tended to hold down
and, in some cases, led to actual declines in the
prices of goods imported into the United States.
Consequently, the prices of imported goods, as
well as the prices of competitive goods produced
in the United States, were temporarily lower than
they might have been otherwise.
Before leaving this section of my remarks, I
would like to reiterate that the reduction in commodity prices, while likely beneficial on net, was
not beneficial to everyone. The Asian crisis has
hurt many—perhaps most—producers of agricultural commodities because their prices have
been so weak.

The downdraft stage of the Asian crisis is past,
and today we are witnessing the recovery stage.
My comments concerning the consequences for
the U.S. economy of the recovery in Asia follow
directly from my previous comments about the
consequences of the Asian crisis. Simply reverse
the direction of the change—“increase” becomes
“decrease” and “decrease” becomes “increase.”
Recovery is indeed underway in Asia. I do not
want to deluge you with numbers, but I would
like to recite a few figures from the International
Monetary Fund. Here are the growth rates for GDP
for a few countries:
Forecast (percent)






















9; 4.0

In addition, with the exception of Korea,
which is expected to grow at a slightly slower
rate, these countries are expected to grow at least
as fast during 2000 as in 1999.
As Asia recovers, we should see the reversal
of capital flows—financial capital should begin
to flow into this part of the world rather than out
of it. This reversal may have something to do with
the upward pressure on interest rates in the United
States this year. The higher rates have clearly
taken housing construction down a bit from its
peak, and may well be slowing automobile
demand a bit. If long-term interest rates remain
at current levels, we may see somewhat broader
effects in coming months.
An obvious consequence of expanded economic activity in Asia for the United States should
be increased demand for U.S. exports and, thus,
increased export shipments from the United
States. Based on the most recent data, U.S. exports
to East Asia have not yet returned to 1997 levels.

The International Connection: The Asian Crisis and U.S. Economic Activity

However, exports to East Asia did increase during
the second and third quarters of this year, an
obviously positive development for the U.S.
export sector.
A similar comment applies to exports by
Missouri manufacturers. Exports, even though
still below 1997 levels, are beginning to increase.
In a comment echoed by a number of Missouri
manufacturers, a local manufacturer reported to
us that his firm’s sales to East Asia dried up for
18 to 20 months. Only in the past six months has
his company begun to receive orders.
We are also seeing rising oil prices, with the
price of a barrel of oil doubling over the last year.
I would like to stress, however, that many factors
are contributing to rising oil prices—the recovery
in Asia is simply one. In contrast to the earlier
period, we are now seeing the consumer price
index (CPI) rise at a faster rate than the core CPI.
Over the 12 months ending October 1999, the
CPI rose 2.6 percent, while the core CPI rose 2.1
The bottom line is that in coming quarters
demand for U.S. production should shift somewhat from consumption and investment to
exports. This shift should have minimal effects
on the level of macroeconomic activity in the
United States.

United States, and have emphasized that those
effects go well beyond the surface effects on U.S.
exports. Despite substantial trade effects for the
United States generally as well as for many
Missouri exporters, the crisis had minimal
aggregate effects on U.S. economic output and
The inflation story is a bit different. Arguably,
the largest macroeconomic effect of the crisis was
to lower U.S. inflation in 1998. The decline was
temporary; recovery in Asia temporarily raised
U.S. inflation, accounting for some and perhaps
most of the increase in the U.S. CPI in 1999. Based
on current forecasts, I’m guessing that the Asian
recovery will continue and that Asia’s role in the
U.S. economy will revert, more or less, to the role
it played in the years before the crisis.
My remarks this morning have focused on
the short-term effects of the Asian crisis and its
aftermath. The fact that the U.S. macroeconomy
has not been adversely affected by the Asian crisis
does not mean we are unaffected in the long run
by the health of East Asia. A strong and rapidly
growing East Asia will contribute to a healthy
U.S. economy. We should welcome prosperity
abroad, and never fear it. And we should pursue
every opportunity to strengthen trade relations.
Doing so will strengthen our prosperity, and that
of our trading partners.

I’ve not attempted to identify the cause of the
Asian crisis; that’s a subject for another day. I’ve
concentrated on the effects of the crisis on the