Concern is growing in the top echelons of Wall Street and Washington that cheap exports from overseas - everything from shovels to chopsticks - may drive down the American economy. The "R" word - recession - is now being heard more often.
As troubles persist in East Asia, Russia, and Latin America, US companies are finding fewer buyers for their goods overseas while foreign products are filling US shelves and showrooms. The concern was reflected on Wall Street Thursday, as stock prices plunged in early trading.
It was a "double whammy," says Joel Prakken, chief economist of Macroeconomic Advisers in St. Louis. Investors were disturbed by new statistics on the American economy and by unsettling testimony to Congress by Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin Wednesday.
Though terming the United States economy strong, Mr. Greenspan noted, "There are the first signs of erosion at the edges, especially in manufacturing."
A plunge in prices on the Tokyo Stock Exchange to a 12-year low didn't help. In New York Thursday, the Dow Jones Industrial Average dropped more than 200 points in early trading.
ECONOMISTS still are forecasting moderate economic growth in the US this year and in 1999. "The slowdown is a little worse than we thought," says David Wyss, chief economist of Standard & Poor's DRI, an economic consulting firm in Lexington, Mass. "And the risks of a recession are rising."
Nonetheless, DRI sees growth in the national output of goods and services at about a 2.5 percent annual rate the rest of this year, helped by a rebound from the General Motors strike. Mr. Wyss predicts 1.5 percent growth next year.
He would like to see the Federal Reserve cut interest rates. Wall Street would, too. It wants interest rates lowered by other industrial nations as well. One reason for the less-than-happy face of many investors yesterday was Mr. Greenspan's testimony that, "at the moment, there is no endeavor to coordinate interest-rate cuts" among the major powers.
Wyss hopes for and expects lower US rates by the end of the year, though not necessarily at the Fed's next gathering Sept. 29.
Some of those policymakers remain in a hawkish anti-inflation mode, rather than worrying about the impact of falling prices (deflation). These include William Poole, president of the St. Louis regional Fed, Fed Governor Edward Gramlich, and, analysts say, Jerry Jordan, president of the Cleveland Fed. "They have got to come around," says Wyss. "I'm not sure what it will take."
Some, though, oppose a Fed rate cut at this time. They don't see the economy slowing that much. Prakken, for one, expects a 2 percent growth in gross domestic product next year.
One concern of economists is that the decline in stock prices itself will hurt growth. Wyss figures $2 trillion in paper household wealth disappeared between the July 17 peak in the stock market and the end of August. If the downturn lasts, it could trim consumer spending by as much as $50 billion.
The Asian crisis has hit US exports hard, too. "The trade data were terrible," says Wyss.
The US trade deficit widened to $13.9 billion in July. Currency devaluations and depressed economies in Asia resulted in exports hitting a 17-month low.
So far this year, the trade deficit in goods and services is running at a record annual rate of $185 billion, 68 percent higher than last year's record deficit of $110 billion. America's deficit with Pacific Rim countries hit $87.8 billion in the first seven months - 42 percent above the imbalance for the period in 1997.
"The trade balance could get a lot worse if there is another round of devaluations," warns C. Fred Bergsten, director of the Institute of International Economics in Washington.
The inflation news was not so bad. In August, the Consumer Price Index was up a seasonally adjusted 0.2 percent, same as in July. For the year, inflation is running at a 1.6 percent annual rate, compared with 1.7 percent for all of last year.
Prakken expresses concern that the "core" inflation rate - a measure that removes volatile energy and food prices - is up 2.5 percent for the past year. His partial explanation of the stock market decline is that Wall Street is finally recognizing that corporate shares have been overpriced, and that earnings will not rise nearly as much as analysts had anticipated.
He expects a "virtual stall" in earnings. The reasons: reduced profits from overseas operation as well as rising wages at home and difficulties in cost cutting.