A Look into Clouds Gathering over US Economy

The NASDAQ composite plunged to 2,262 points by last Friday from its peak of 5,000 in early last year. The technoloy stocks have lost almost all their dizzying 87 percent gains in 1999, and the feeling on Wall Street is that it still hasn't hit bottom.

Yet, the NASDAQ is just one of the indicators or indices suggesting a weakening US economy, whose growth, as Federal Reserve Board Chairman Alan Greenspan put, is probably "very close to zero."

What have stalled a decade of boom in the US economy? Many economists said a domestic stringent currency policy and the raised crude oil prices in the world market were behind the bad news. But the good news they brought is that the US economy would not be as bad as plunging into a recession this year.

Indicators have supported Greenspan's pessimistic remark on the economy. In the fourth quarter last year, economic growth dropped to 1.4 percent, much lower than 4.8 percent in the first and 5.6 percent in the second. The 1.4 percent quarterly growth was the weakest since a 0.8 percent growth rate in the second quarter of 1995.

Consumer spending, which has been an engine for the economy, grew at an annual rate of 2.9 percent in the fourth quarter, the weakest growth since the second quarter of 1997, and down sharply from a 4.5 percent rate in the third quarter.

Business investment, a key force behind economic expansion, decreased at a rate of 1.5 percent, the biggest decline since a 2 percent drop in the fourth quarter of 1991, as the economy was pulling out of the last recession. In the third quarter, such spending grew at a 7.7 percent rate. The weakness in the fourth quarter came from a sharp drop in spending on computers and other equipment.

Consumer confidence also fell sharply in four consecutive months from October 2000, and plunged to its lowest level in four years in this January. The Consumer Confidence Index dropped more than 14 points to 114.4, the lowest level since December 1996 when it was 114.2.

So why the sudden shift? Even late in the year 2000, economic experts were still optimistic about the year 2001 economy. The International Monetary Fund predicted a growth rate of 3.2 percent for the U.S. economy, and 4.2 percent for the world as a whole. The sputtering U.S. economy may prove its expectations are too optimistic.

Among the many factors that slowed the U.S. economy, the most important one is believed to be the stringent currency policy of the U.S. Federal Reserve (the Fed). The policy diminished corporate investment and eroded American spending confidence, leading to a precipitous decline in personal consumption.

The Fed, however, had its reasons for doing so. In recent years, the U.S. economy became over-heated, leading to a labor shortage and rising cost in labor, signs of an increasing inflation. Taking precautions, the Fed raised the short-term interest from 4.75 percent to 6.5 percent.

The downturn of the stock market shrank the wealth of many American families and thereby further depressed consumer confidence.

In addition to the stringent currency policy, soaring crude oil prices last year also brought negative influence on the U.S. economy.

With a scale of 10 trillion U.S. dollars, the U.S. economy plays a leading role in the world economy and is more influential than ever with the aid of globalization.

For example, exports from Asian countries to the United States, excluding Japan, account for 10 percent of their Gross Domestic Products (GDP) on average. In Singapore, Malaysia and the Philippines, exports to the United States constitute up to 20 percent, 27 percent and 16 percent of their GDP respectively.

Due to a stalled U.S. economy, analysts have already lowered expectations of the rate of increase in the global economy to 3.4 percent, down from 4.2 percent last September.

Many economists fear that a prolonged weakness in the U.S. economy could eventually drag down the global economy as well. Yet, Greenspan believes a revival is in the wings, because various indicators are flashing signs of an upturn.

The one full percentage point interest cut by the Federal reserve in January, the first time the central bank has ever moved so quickly during Greenspan's 13-year tenure, effectively lowered borrowing costs, spurred consumer spending and business investment.

The all-important consumer sector seems to have rebounded in January following a disastrous December, and job growth was also solid in January, even though the unemployment rate ticked up to 4.2 percent.

There is a "reassuring picture" that US under-performance is just temporary. The rates of inflation and unemployment remain low, the Internet industry still faces a promising future, productivity has been increasing and a budget surplus is expected this year.

In addition, declining world energy prices has provided favorable outside conditions for the revival of the US economy.

Confronted with a drop in economic estimates, most experts still agree that if the US government and the Federal Reserve adopt appropriate financial and monetary policies, the clouds over the stalled US economy may clear soon.

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