United Press International - April 28, 2003
Ian Campbell, UPI Chief Economics Correspondent

There is always something unbalanced about economic and, to a degree, all news reporting. Go to a mall in the United States in the midst of the U.S. slowdown and you will find it full of struggling Americans: struggling to cope with two hugely overburdened shopping carts. But economics is interested in what goes on at the margin. Those carts may have one or two packets of pretzels and a T-shirt less in them than a year before. Somewhere, unlikely as it may seem, that is going to hurt.

The outbreak of SARS in Asia has an element of this about it. It appears to have killed several hundred people. Another virus, known as HIV/AIDS, has killed millions and millions more are suffering from its symptoms. Above all in Africa, AIDS has proved devastating. SARS, we hope -- and, on what we can see so far, expect -- will never be even remotely as damaging. But AIDS and Africa's plight is now factored in, accepted and, sadly enough, largely ignored. SARS is a phenomenon that appears far less important but is currently more important because, from the global economist's point of view, it is not factored in, accepted and ignored.

And its impact on some Asian economies is, according to the forecasts of economists who specialize in the region, surprisingly strong. The Economist Intelligence Unit in London has revised its GDP growth forecast for Hong Kong for 2003 from 2.5 percent to 0.3 percent "because of SARS and the disruption it will cause to Hong Kong's retailing and tourism industries." The EIU has also cut its growth forecast for Singapore for 2003 from 3.1 percent to 2.6 percent. Meanwhile, it is reviewing its forecast for China.

HSBC bank's forecasts for Hong Kong and Singapore concur. Arthur Woo, HSBC's Asia economist, has cut his GDP forecast for Hong Kong in 2003 by two-thirds, from 1.6 percent to 0.5 percent "because consumer confidence has been so severely jolted." In Singapore, similarly, he takes about a third of his growth forecast, cutting it by "a painful 0.8 percentage points."

What will all this do to the world economy? HSBC's global economist, Janet Henry, comes up with a surprisingly benign impact. "Assuming the virus is brought under control quickly," she sees the primary impact as being through trade flows and estimates that "Every 1 percent slowdown in Asian growth reduces global growth by 0.2 percentage points directly but trims growth in the G7 (the major world economies) by less than 0.1 percentage point.

If this judgment is correct, Asia's severe acute sickness will barely make the U.S. economy sneeze. The reason is the big story that is now accepted and largely ignored, that Japan, the big economy of the region, has long been ailing with a severe acute stagnating sickness of its own and appears not to have caught much of a fresh infection from SARS. But for the United States and the world it is the old, ignored, at present unchanging story -- Japan's stagnation -- that matters.

The first-quarter growth numbers that the U.S. government published in the past week show how Japan's sickness and that of sclerotic Europe matter to the United States. U.S. exports of goods and services decreased by 3.2 percent in the first quarter in real (volume) terms, having decreased by 5.8 percent in the fourth quarter. The United States has its biggest trade deficit in history and its export volumes are falling. The demand for U.S. goods is not there in the rest of the world because other economies are weak. That is a problem. It means the United States can only correct its trade imbalance by slowing down and consuming less itself.

In the late 1990s the United States generated its own GDP growth and that of most of the world. It was the engine, an engine being run at that time far too enthusiastically, far too fast and on what we have described in previous columns as a dangerous and experimental fuel known as bubbly: cash created by stock market euphoria.

Now bubbly fuel is discredited and is no longer being produced. The United States has found only a partial replacement: another experimental bubble fuel (that will eventually be discredited, having done even more damage than the original bubbly) known as soaring houses. In the first quarter "real residential fixed investment" rose by 12 percent after an increase of 9.4 percent in the fourth quarter. Almost one-third of the growth recorded by the U.S. economy in the first quarter came directly from housing. And the housing boom has, too, its knock-on effects on private consumption: the high sales of carpets and curtains and door knobs and other things to fill houses at Home Depot and Wal-Mart and all.

In the numbers for these sales Wall Street economists find hope. But what they ought to find is merely imbalance: one sector of the U.S. economy whose trend is utterly and unhealthily out of line with the rest of it. House prices are enjoying the sort of inflation that the stock market enjoyed in the second half of the 1990s. Look how that has ended up.

The real story is less dramatic and more inexorable: the story of gradual loss of momentum.

Personal consumption, which makes up two-thirds of U.S. GDP, rose by 1.4 percent in the first quarter and by 1.7 percent in the fourth quarter of 2002. These sub-2 percent outturns are the worst since the mini-recession of 2001.

Private investment spending fell by 3.2 percent after a fall of 5.8 percent in the fourth quarter of 2002. For seven of the past 10 quarters private investment spending has declined. For nine of the past 10 quarters government spending has increased. The fiscal deficit is soaring. The war in Iraq has helped to push up government spending in a manner that cannot be continued. Government money is yet another source of growth that cannot keep being tapped.

The story investors should keep their eye on is not SARS nor any hoped-for post-Iraq-war revival in the U.S. economy and stock market. It is on the fact that the U.S. economy is more and more sick and unbalanced and is running out of healthy sources of growth: spending that does not come from the government or house price inflation.

The U.S. economy is heading for a recession deeper than the mini one it recorded in 2001. That is the only way that its growing imbalances will be corrected. There is nothing severe or acute or, at present, news-catching about this. It is the gradual trend that counts. The over-burdened American shopping carts will have a few items less in them. In the United States and around the world, that is going to hurt.

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Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to icampbell@upi.com.)

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