So far it appears the interest rate cuts engineered by the Federal Reserve are mitigating the effects of the international financial crisis.  By lowering interest rates the Federal Reserve stimulated the consumption of goods and services by domestic households.  The lowering of rates has also helped to stimulate residential and business construction and the stock market.

     Further, the decline in the prices of foreign made goods and services, estimated to be about 6 percent lower in 1998, has helped to keep domestic inflation in check.  For example, the broadest measure of inflation, the GDP price deflator, rose by just 1 percent in 1998.  This is the lowest amount of economy wide inflation since 1959!  Low inflation is good in the sense that is helps to provide a more predictable, less risky environment for the nation's capital markets.  This in turn helps to create financial wealth for our citizens, which provides additional stimulus to the economy.

     One would expect then that unemployment rates in this country would be relatively low compared to historic norms.  And indeed this is the case for the nation, state, and region.  For example the unemployment rate in Wisconsin for all of 1998 was 3.4 percent, the lowest rate since 1969.

     However, most analysts believe that the international financial crisis will eventually slow down the U.S. economic juggemaut later in this new year.  But given the surprisingly robust nature of the U.S. economy, economic analysts have revised their forecasts upwards and now believe the impact may just lower growth, in the 2.0 to 2.5 percent range by year end.  It is also clear that the U.S. trade balance with the world will be greatly affected by the international financial situation.  Already the trade gap for January to November shows imports exceeding exports by $153.36 billion.  It is very likely that our relatively expensive exports and the relatively cheap imports of Asia will push the trade gap to an all-time high in 1999.

     Even though the U.S. economy is very robust there are pockets of economic distress.  For example, manufacturing is being disproportionately hurt by the international situation.  Industries such as heavy machinery, paper production, steel, and aircraft are all suffering from the situation.  States like Wisconsin, which are more dependent on manufacturing, will feel the impact of the international situation more than those areas that are more reliant on services and construction activity.  This is already showing up in wage and benefit data.  The Midwest, which is a manufacturing intense area, was one of the few regions in the U.S. to experience a decline in its rate of wage and benefit growth from 1997 to 1998, 3.6 percent to 3.3 percent.  Thus, look for our sate economy to continue to grow, but also anticipate that it will be more affected by the international financial crisis than some other parts of the country.