Over. the past twelve. months the economy grew by a robust 3.9 percent on an inflation adjusted basis. Equally impressive was the 6.0 percent gain registered in the output of the country's factories. Short‑term interest rates remain low as proxied by the three month treasury bill. But perhaps the most impressive national statistic was the incredibly low inflation rate of 1.7 percent. However, not all economic circumstances are as heartening as these.

     The economic woes of Asia have been much in the news since the November Quarterly Economic Indicator report was published. This financial crisis was precipitated in part by the unsustainable expansion of productive capacity and poor financial management by many Asian countries. It became clear that the foreign debt incurred to finance their economic growth was excessive in the sense that it would be difficult, if not impossible, for these countries and their corporations to meet their foreign debt obligations.

     Asian countries such as South Korea, Thailand, Indonesia, et. a.l., found themselves in a position needing more foreign exchange than they were capable of generating through trade. Once foreign currency markets perceived that these currencies were overvalued confidence was quickly lost. The sell off of their currencies caused the exchange rates to dramatically fall vis a vis the currencies of other countries. The economies of these Asian countries have plummeted as it became clear they were going to have to experience a painful financial restructuring. Conditions set forward in the International Monetary Fund relief packages require these countries to undertake austerity programs which will help facilitate the paying back of foreign debt. For example, the curtailing of government expenditures on various domestic programs and letting business firms with bad balance sheets fail are part of the program to right their financial situations. Also, these countries have been required to devalue their currencies and thus cut imports.

     What are the ramifications of this economic turmoil? Economists are not sure how severe the impact will be on the U.S. economy. However, they do agree the U.S. will feel the effects of the situation. The scenario receiving the most discussion suggests the impact to our economy will come in phases. Initially the impact will be small and little felt by the general public. Early on our economy might actually be helped by this situation because foreign goods and services will become cheaper and thus help to keep our domestic inflation rate at a low level. This will give the Federal Reserve the latitude of not having to raise interest rates.

     As time unfolds, however, many of our domestic industries like the electronic, automobile, steel, and aircraft will experience declines in orders for their products. Simply stated our goods and exportable services have become much more expensive to those Asian countries due to the weakness of their currencies. This will have a negative impact on U.S. firms' earnings and their stock prices. Moreover, many domestic firms will notice growing price petition in the U.S. as Asian exports become less expensive to U.S. consumers. Thus, many economists see the escalation in price competition as possibly causing a new round of corporate downsizing later this year. In other words, some of our domestic firms will be forced to restructure their business to remain competitive. Economists are also suggesting that the Asian financial crisis will cause our GDP growth rate to be at least one percentage point lower than it would have been otherwise. The consensus is, however, that even though we will feel the sting of these events, the domestic economy is so fundamentally strong that the crisis will not cause the U.S. to slip into recession.

     Our state and region are likely to be impacted by these events, but not as much as say California, which has strong economic ties to Asia. The issue to consider from the Mid‑West's standpoint is that we are more dependent on manufacturing than the rest of the country. From a historic point of view Wisconsin and the Mid‑West have not fared as well as the country when exchange rate movements have caused the dollar to soar. However, mitigating the situation this time is that Asia is not our major trading partner, i.e. Canada and Mexico come to mind as being more important Further, our industries have become much more cost efficient over the past twenty years, and the outlook for energy prices remains benign. Thus, we should be able to weather this coming storm better than when such circumstances have arisen in the past.