NEW YORK -- Americans, it would seem, have it made. The U.S. economy appears to be immune from negative effects of the devastating financial problems in Asia, as the stock market continues to reach record highs and consumer confidence soars. But can the exuberance in the United States persist through 1998?
The question of the effect of the Asian meltdown on the U.S. economy still dogs economists and strategists, who are unable to agree on whether the market will keep rising or head south. The question is also of keen interest to retailers, including supermarket executives.
While some forecasters have started warning about a slowdown in growth in the second half of 1998, almost all expect retailers to do well because they do most of their business in the United States. Low unemployment and steady interest rates should keep consumer spending on course -- and this spending fuels about two-thirds of the nation's economic growth. David Blitzer, chief economist for Standard & Poor's, predicts U.S. economic growth will dip to 2.75% in 1998 from 3.7% last year.
"The drop is half attributable to the difficulties in Asia and half attributable to the unsustainable pace of growth we've been experiencing," he said.
Blitzer said he thinks the United States will see a "noticeable shift, but not a disaster," later in the year.
"Trade flow will be substantially impacted in the second half because of an anticipated shift in U.S. exports and imports," he said. Blitzer explained that the strength of the U.S. dollar will slow the rate of U.S. exports to Asia in the third quarter, while Asian imports to America will increase because of lower prices.
Stephen Dalton, managing director at CoreStates Investment Advisors in Philadelphia, said, "We haven't seen the true impact of the Asian turmoil on U.S. company profits. The end of the second quarter will give us a full-blown view, after earnings are released."
"The market tends to discount the future about six months out," Dalton added, explaining that it takes that long for the market to catch up to reality.
Dalton, who also expects a domestic slowdown in the second half, reports that the slow growth will affect companies in sectors that do a lot of their business in Asia, but it won't be "broad-based."
"Retailers will reap the benefits, as the weakened Asian currencies can mean lower costs of goods for Asian imports," noted Dalton.
Edward Yardeni, chief economist at Deutsche Morgan Grenfell, concurred.
"I think the Asian meltdown may cause problems later, but for now the United States hasn't skipped a beat. Near-term, it's been beneficial to the United States," Yardeni said. "Retailers are getting the windfall because of the cheaper imports."
But don't expect retailers to pass the savings to consumers. According to Robert Buckman, senior vice president and portfolio manager for Brandywine Asset Management, "The currency devaluations don't mean a whole lot, because orders placed by retailers+are in U.S. dollars. Vendors wishing to remain competitive will offer discounts, but it won't be more than 3% to 5%."
A 5% discount isn't a significant difference for either consumers or retailers, added Buckman. He explained that a 5% discount at the opening price points is meaningless, since consumers tend to wait for items to go on sale before buying. Retailers know they'll have to continue marking down the price until they hit that "sweet spot" that clears out the inventory, he continued.
"Even with a 60% discount, retailers still end up with a decent profit," Buckman concluded.
If retailers do see any benefit, it won't be until the fourth quarter because spring and summer orders have already been placed, noted Peter Schaeffer, retail analyst at SBC Warburg Dillon Read.
With orders placed in U.S. dollars and retailers probably choosing to keep the same vendors, Schaeffer said he expects any gains to be minimal. Retailers are likely to keep any benefits they reap for themselves -- particularly, retailers whose bottom lines haven't grown and who are pressured to increase margins, he noted.
On a more upbeat note, Stephen Roach, chief economist at Morgan Stanley Dean Witter, said, "The fears over Asia are overblown. The trends in early 1998 show low unemployment and record levels of consumer confidence."
Low interest rates and a steady 4.7% unemployment rate translates into more cash available for spending, and Roach predicted "consumers will deliver."
According to Arun Kumar, investment strategist at Lehman Bros., consumer demand accounts for about two-thirds of the gross domestic product.
With unemployment remaining at 4.7% and mortgage payments remaining affordable because of low interest rates, consumers will have money to spend, Kumar said. Tax refunds, he added, will give consumers an additional boost through the end of May before economic growth starts to slow down.
Deutsche Morgan's Yardeni expects that low inflation, plus stable interest rates, will keep consumer-spending levels strong for some time.
"The Federal Reserve is not going to raise the rate until it is more certain of what the impact of Asia will be," Yardeni said.