Economic Outlook for 1998

Asia. Call it the big caveat.

While the economic prognosis for Central Kentucky is certainly positive according to the Kentucky Annual Economic Report for 1998 recently released by the University of Kentucky's Center for Economic Research, the turmoil in Asia, formerly dubbed "The Asian Crisis" by a frenzied media, may already be rearing its ugly head in the United States.

Consider the following:

• Software maker Oracle's stock took a 29 percent hit on December 9. The blamed the loss on events in Asia and the strength of the dollar.
• Coca-Cola, which derives 70 percent of its operating income from outside the United States, 30 percent from Asia alone, saw its stock fall 4 percent on December 8.

Many analysts attribute the losses to events set in motion last summer with the Asian currency crisis. And while Asian sales account for just a small part of total profits for many U.S. companies, the region has accounted for a good deal of the growth those companies have recently enjoyed. Take that growth potential away and who knows what will happen.

How is that for a caveat? Should we be worried?

Not yet, says Dr. Mark Berger, director of the University of Kentucky's Center for Economic Research.

"Any of our forecasts are subject to that kind of caveat," says Berger. "If the national forecast were affected by Asian events, and I don't think they have been by and large, then we would certainly feel the effects of that here in the state. But figures for overall growth and gross national product, and so on, nobody is revising those downward because of the events. Maybe that will change."

Some economists believe recent events in Asia could even serve to strengthen the U.S. economy by inducing a temporary slowdown thereby keeping inflation and interest rates at bay.

Caveats aside, what is clear is that the United States is enjoying record employment coexisting with record low inflation, despite the fact conventional economic wisdom says the following: Low unemployment leads to a tight labor market. A tight labor market induces wage pressures. Wage pressures lead to inflation, and so on. For economists, it is somewhat confounding since no one really knows just how fast the economy can grow without inflation quickly following.

Well, the economy continues to grow at a record pace and inflation isn't rising, it's falling. And only in the past two years have wages begun to rise ahead of inflation, and that after a lengthy period of stagnation. Some economists, or at least some folks who frequently write about economists, have resorted to using the phrase "The New Economy" to explain why the accelerated growth of the economy has been able to occur minus inflationary pressures. The phrase itself suggests some new factors are at work which economists, as of yet, are unable to account for.

Berger sees things differently, however. "The underlying economics are the same," explains Berger. "I think that macroeconomics has been in such a state of flux recently that you get people who see this kind of change as challenging old beliefs, but the basic notions of specialization, scarcity, and so on, still hold true."

Another critical factor is the explosion of technology and expanded global markets, hence the interdependent relationship of the U.S. economy on other markets and economies.

"I think it is technology driven," says Dr. Jim Fackler of the University of Kentucky Gatton College of Business. "That brings with it brutal competition. And that is why companies can't make price increases stick."

Indeed, the technology industry is unique in that each year the prices of its goods actually go down, rather than up.

Fackler also believes the way the economy is measured might have something to do with today's confounding scenario. "I believe that 10 years from now, we'll look back and see that aggregate economic statistics were grossly mismeasured."

Kevin Depew is editorial director of The Lane Report.

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