Ready to 'Brake,' not 'Break'

Most economists forecast the United States economy would slow this past winter. It didn't.

They made the same prediction early in 1997. Instead, national output soared. But at last the economy may be braking - maybe.

Bruce Steinberg, chief economist for the New York-based brokerage house Merrill Lynch & Co. sees gross domestic product (GDP), the total output of goods and services in the US, rising a mere 1.5 percent - at an annual rate, discounted for inflation - this quarter and picking up the pace to 2.5 percent in the last half of 1998.

Michael Cosgrove goes further.

"The possibility of a negative GDP in the third or fourth quarter is not remote," says the University of Dallas forecaster. After that quarter the economy will grow again.

What's happened is the economic crisis in east Asia has been worse than anticipated. It's hitting hard at US exports.

Without the worsening trade balance, the economy would have grown at a 7.5 percent annual rate in the first quarter instead of 4.8 percent, says Mr. Cosgrove.

Further, goods have been piling up in stores and warehouses because production has exceeded sales. Those inventories grew at a $101 billion annual rate in the first three months of the year.

"That is just huge," says Mr. Steinberg. It is the largest inventory buildup in history.

The backlog will slow industrial output, economists assume, as retailers wait for sales to catch up in the coming months.

It is an odd time when bad statistical news often gets applauded on Wall Street. A slowdown, analysts hold, reduces chances of the Fed hiking interest rates to cool a booming economy, thereby hitting stock prices.

"It's kind of a reverse twist," says A. Gary Shilling, a Wall Street economist.

Steinberg says that even a stock-market correction "may well be healthy because it would relieve worries about the US overheating."

But the slowdown didn't get much support from the May employment report released Friday. Business added 300,000 employees, more than the 225,000 expected. Unemployment stayed at 4.3 percent.

The stock market cheered, perhaps seeing a cutback in manufacturing jobs. Most economists regard the market's rise in wealth as a substantial prop to the economy. The Standard & Poor's 500 index rose an average 28.35 percent each of the past three years.

For the first time ever, the value of stock shares owned by US households exceeds the value of their real estate. "The US economy is more sensitive to the equity market than it or any economy has ever been," Steinberg says.

The wealthiest 25 percent of American households own most of that stock. And they do about 50 percent of consumer spending. Feeling flush, many stockholders have been saving less. Consumers have been setting aside only 3.5 percent of their incomes, the lowest personal savings rate in 59 years.

Steinberg figures that drop in savings has added $200 billion a year to consumer spending.

The big worry is that Asia's troubles will worsen and spread. "Most Asian economies continue to shrink pretty rapidly," says Steinberg.

But economist Stephen Roach of Wall Street's Morgan Stanley sees no Asian-related meltdown ahead. China's growth will remain a brisk 7 to 8 percent. Japan will suffer only a shallow recession. And the International Monetary Fund's austerity programs in Asia are being "dismantled," which should lessen the possibility of the sort of turmoil that occurred in Indonesia.

Correction:

Last Monday, an item on Page B2 in the Work & Money section should have said US Gross Domestic Product rose 4.8 percent in the first quarter.