Other measures of national performance over the past twelve months suggest that the national economy benefited from the virtuous circumstances of low inflation, low interest rates, and rising output. Specifically the CPI rose by just 1.5 percent and short-term interest rates have fallen by 50 basis points since 3rd Quarter 1997. As evidence of the influence of these items have had on our economy consider that our nation's factories increased their production by 5.1 percent over the year, and employment continued to rise in the nation, state, and region.

     The full impact of the financial crisis gripping Asia and other parts of the developing world has yet to be fully felt by the nation, Wisconsin, and our region. The near collapse of these developing nations' economies will affect the U.S. economy and our area. There is little doubt in the minds of the majority of forecasters that the U.S. economy will slow, if not during the 4th Quarter 1998 then most assuredly in 1999. A few analysts even go so far as to indicate that the chance of having a mild recession in 1999 is at fifty percent.

     Even the most optimistic forecasters are writing that we are going to experience a period of slower growth in 1999. This can be best explained by understanding the interdependence of the world economy. The financial crisis in Asia and other parts of the developing world was precipitated in part by the overestimation of the potential profitability of many investment projects. Simply stated capital flowed into these areas from all over the world to finance business expansions and public infrastructure projects that proved to be highly speculative in nature. Also, the domestic governments and lending institutions in those countries participated in the channeling of foreign capital to these various projects which in hindsight had little chance of being profitable. These projects and investments were being developed at a time when most products markets in the world suffered from overcapacity, and as a matter of fact worldwide overcapacity remains an issue for many goods and services.

     It finally became apparent to overseas investors and lenders that these countries were going to have difficulty selling enough of their goods and services to the rest of the world to earn the foreign exchange necessary to satisfy their debt and equity obligations. Remember the vast majority of the financial capital, whether debt or equity, came in from outside sources as the governments, businesses, and financial institutions in these countries did not have sufficient sources of internal capital to finance their ill fated expansion plans. When investors realized the situation, international capital quickly left these countries. As a result of this capital flight the currencies of these developing countries plunged in value, especially in relation to the U.S. dollar.

     For a while our country benefited from the financial capital inflow. Investors and institutions from all over the world poured their capital into the U.S. financial markets. Witness the record highs achieved in the stock market in July of this year. However, when it became clear that this financial depression was spreading from one developing country to another investors realized that these countries would be less able to afford U.S. goods and services, and as a result many U.S. corporations would see their profits decline. Moreover, less costly imports would eventually place tremendous competitive pressure on domestic firms, again hurting profits. Since mid-summer this country's financial markets have been on a wild up or down ride as investors have become quite skittish, reacting swiftly to the latest news reports.

     The problems stemming from Asia and elsewhere have caused a number of U.S. firms to abandon their domestic expansion plans. Also, many business firms have found that the uncertainty in the world's financial markets has caused a capital flight to quality. This means that investors are placing their funds in the safest investments to avoid potential turmoil. This makes the flotation of new equity or debt to finance operations much more difficult, if not impossible, in some situations. The Federal Reserve was so concerned by this capital crunch that it lowered two key short-term interest rates in an attempt to provide more liquidity to our economy to counteract the crunch. Moreover, by doing this the Federal Reserve hopes to stimulate borrowing on the part of businesses and households and thus offset the loss of economic activity associated with exporting. Further, lower interest rates should make the dollar less desirable, reducing the exchange rate. Only time will tell if the Fed action will prevent recession and instead provide a soft landing for the U.S. economy.

     Wisconsin in particular could fair worse than the U.S. as a whole if a slow down does materialize. Wisconsin and our region is more heavily dependent on manufacturing goods than the rest of the country. Manufactured goods tend to be more exportable than services, thus more sensitive to exchange rate fluctuations. To the extent that the dollar has become overvalued, foreign sales will become more difficult, and perhaps even more importantly our firms which have to compete domestically with imported products that gained a significant price advantage from the situation. Historically, Wisconsin has not faired well economically speaking when the dollar appreciates against foreign currencies. Thus, if the U.S. slows look for Wisconsin to slow even more in terms of jobs generation and income growth. However, the longer-run prognosis is that our national and state economies are fundamentally very sound and should rebound once stability is reasserted in the world economy. Hopefully, the industrialized countries of the world will soon enact reforms that will reestablish order and stability in the world's capital markets.