U.S. Economy Slowing Down? Cut Taxes.
The U.S. economy has hit a bump. In the first quarter of 1998 it grew at an annualized rate of 5.4%. The final second quarter numbers aren't in yet, but it appears the economy contracted by as much as 1% or 2%. Even granting that the first-quarter figures were buoyed with inventory accumulation that was worked off in the second quarter, this reversal of fortunes is remarkable.</br></br>Asia is the culprit. The continent is in an economic tailspin. Japan has had virtually no growth for six or seven years and is now officially in a recession. South Korea, Indonesia, Thailand, and Malaysia are all in serious trouble brought on by corruption, cronyism and fraud. Curiously, China remains relatively stable because it avoided the excesses of debt that ultimately ruined the other Asian economies.</br></br>Why does this matter to us? The Commerce Department reported that the U.S. trade deficit hit a record of $15.7 billion in May. As President Clinton noted at a news conference last Friday, "almost the entire increase in the trade deficit is due to the Asian economic troubles." The higher deficit may not matter much in the long run but in the short-term it forces U.S. companies to make costly production adjustments. Firms that manufacture widgets, both for export and to compete against foreign-made widgets in the U.S., will find themselves temporarily overstocked and will have to decrease production accordingly.</br></br>The trade deficit is likely to keep growing. If experience is any guide, many Asian businesses will do anything to keep their plants open, including dumping goods by selling at below market price in any market that can absorb them. Perhaps the only reason we haven't seen this dumping yet is that, because the Asian crises originated in their financial markets, export financing has been hard to come by.</br></br>International trade has boosted the U.S. economy for years, but now it is an economic drag and will remain so for some time to come. As Asian economies falter, foreign demand for U.S. goods and services falls. And as imports rise, U.S. companies find the competition tougher at home.