September 17, 1998
Since hitting its record high in July, the Dow Jones Industrial Average has lost nearly 16 percent of its value. Does the market's fluctuation signify a slowdown for the American economy? Elizabeth Farnsworth and four regional analysts discuss the U.S. economy.
JIM LEHRER: Now a regional look on the economy and to Elizabeth Farnsworth in San Francisco.
A RealAudio version of this segment is available.
September 16, 1998:
Treasury Secretary Rubin assesses the global markets.
September 8, 1998:
Will the Federal Reserve lower interest rates?
September 1, 1998:
The Dow gains over 300 points.
August 31, 1998:
The Dow Jones Industrial Average falls 512 points.
August 26, 1998:
Why is the Russian market collapsing?
August 11, 1998:
One World, One Market: Is globalization good or bad for America?
July 24, 1998:
Japan's ruling party chooses its next prime minister.
May 28, 1998:
The Russian government tries to maintain the value of the ruble.
April 3, 1998:
The U.S. economy soars as Japan continues to fall.
February 3, 1998:
The rippling effect the Asian economic crisis.
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ELIZABETH FARNSWORTH: Today's stock market loss of 216 points left the Dow 60 percent below its record high in mid July. Is Wall Street signaling a fundamental change in the health of the U.S. economy? To find out, I'm joined by four regional economic analysts: Marty Bechmann, a venture capitalist who advises small business entrepreneurs in Silicon Valley; Morton Marcus, director of the Indiana Business Research Center at Indiana University's Kelley School of Business; Gary Shoesmith, the economics professor at the Babcock Graduate School of Management at Wake Forest University; and Tom Fullerton, economics professor at the University of Texas, El Paso. Thank you all for being with us. Gary Shoesmith, does the falling stock market reflect what's going on in your region? Does it reflect witnesses?
The Southeast economy.
GARY SHOESMITH, Wake Forest University: No, I really don't think so. I think it would take more than stock market volatility to put a serious dent in the Southeast economy. Now some of the reasons that the stock market is volatile right now has caused some problems in the Southeast, but even that has been on a spotty basis across different industries and different states.
ELIZABETH FARNSWORTH: What kind of problems, though?
GARY SHOESMITH: Well, on the export side, electronics, industrial machinery, and various other manufactured products have suffered some in terms of trying to reach that area of the world, and, in particular, I'm talking about Asia. And at the same time, imports have been pouring in for products like textiles and apparel, and especially apparel, given the higher labor content.
ELIZABETH FARNSWORTH: So, Gary Shoesmith, you're saying it's not the stock markets affecting you but what's affecting the stock market, i.e., Asia, Russia, Latin America, is affecting you?
GARY SHOESMITH: Exactly. I think the only real effect that this stock market volatility will have on the economy is no different for the Southeast than it is for the nation as a whole. And that is that the increased volatility means increased risk, and the consumers will consider that in making consumer spending decisions. So we've already seen some reduction in the growth of retail sales here in the Southeast, which is really no different than for the nation as a whole.
ELIZABETH FARNSWORTH: Okay. I'm going to come back to that. Mary Bechmann, do the losses reflect any changes here in the West?
MARY BECHMANN, Venture Capitalist: Well, I think what's going on in Silicon Valley is that we're really a little schizophrenic, and what I mean by that is that you look at some of the sectors in large companies – Fortune 1000 – for example, semiconductors – and the equipment companies that supply to that supply to that industry – and they've been hit and hit hard. They're reeling. Every other day you read about a plant closing or someone delaying plants adding capacity.
ELIZABETH FARNSWORTH: And that's because they're – people are not ordering whatever it is –
MARY BECHMANN: Exactly. Orders aren't coming in.
ELIZABETH FARNSWORTH: Asians aren't ordering.
MARY BECHMANN: Exactly. Or other parts of the world, which have particularly been dependent – dependent on for so many years to drive the growth once U.S. market growth kind of topped out in the last couple of years, and that growth either isn't there any longer to the same degree it has been in the past, or profitability is starting to erode. And, as you know, in the U.S., amongst the large companies, oftentimes profitability is what drives stock prices, and so if stock prices aren't at their historical high levels, then you've got uncertainty, you've got a little pall cast over some of what's been going on out here in the large corporate arena.
ELIZABETH FARNSWORTH: But you've mentioned schizophrenia.
Ms. Bechmann: "I mean, not to be flip about it, but there are just dozens – hundreds – thousands of opportunities in the Internet area."
MARY BECHMANN: Well, what I mean by schizophrenia is that on the other hand, we've got Internet fever. I mean, not to be flip about it, but there are just dozens – hundreds – thousands of opportunities in the Internet area. And if you look at what's going on amongst the small and emerging growth companies out here in Silicon Valley, you would think that the stock market or Asia or Brazil or Russia were barely a blip on the radar screen. People just haven't factored them into their psyches yet. They are not really concerned about them, and all you hear really – all I hear is that business is booming; profits are high; the Internet is going to keep on growing; and there's frankly no end in sight.
ELIZABETH FARNSWORTH: Interesting. Tom Fullerton, in Texas, how worried are people in your region about what's happening around the world?
TOM FULLERTON, University of Texas, El Paso: Well, Elizabeth, people in Texas have some cause for concern due to the fact that the Mexican economy is walking a tightrope or a knife edge, but for the most part, the Texas economy remains fairly robust; it remains healthy. Unemployment rates among all of the non-border metropolitan economies remain very low. Housing market conditions are healthy. So there is some concerns, but I think it's important to recall that the linkages between Wall Street and Main Street are always a little bit nebulous, and I think in the context of 1998, those linkages are weaker than they have been in other years.
ELIZABETH FARNSWORTH: Why do you think that was the case?
TOM FULLERTON: Well, one major ingredient that is missing from the current outlook in terms of business cycle downturn potential is the fact that energy prices in general remain low and are projected to remain low throughout the balance of the year. In the entire post war history of the United States there has never been a major economic recession that has not been accompanied simultaneously by some type of energy price hike. And that remains absent from the scene – throughout the foreseeable future.
ELIZABETH FARNSWORTH: But, Mr. Fullerton, the low oil prices are hurting Texas, aren't they?
TOM FULLERTON: Well, it is hurting certain segments of the Texas economy, particularly those segments that are involved either in wellhead management or in exploratory activities and throughout the state. That also represents risk to the Mexican economy because more than 30 percent of the Mexican federal budget is determined by oil-related revenues.
ELIZABETH FARNSWORTH: And Mr. Fullerton, oil prices are down partly because of lower demand in Asia, right?
TOM FULLERTON: That's correct, and that's probably the most direct linkage between the Texas economy and the Asian – the Asian Pacific Rim economies. To the extent that they continue to fall through or at least not grow as robustly as they did during the first part of this decade, oil prices will continue to remain low, that poses a risk for Mexico, and Mexico, of course, is one of the major export markets for all Texas manufacturers.
ELIZABETH FARNSWORTH: Morton Marcus, in the Midwest, how – what is – how would you describe the link between the falling stock market and the rest of your economy?
MORTON MARCUS, Indiana University: Well, I think the numbers that people are watching in the Midwest are focused on 63 right now. We have two men who are workers here in the Midwest who are dong very well. That's Sammy Sosa and Mark McGwire, and I think they're getting much more attention than the stock market. The situation in the Midwest is that there's a great deal of concern about the value of the American dollar and what it's doing to exports and hence to American corporate profits. Many companies have had severe hits on portions of their business that are overseas, particularly in East Asia and in Southeast Asia.
ELIZABETH FARNSWORTH: Excuse me for interrupting, but explain how that works.
Mr. Marcus: "When the preconditions for a recession are present, it's the Midwest that feels it first."
MORTON MARCUS: Well, the point is that if you're not able to sell your products, that you're either manufacturing here in the United States and sending abroad, or if you can't sell those products that you're making abroad, because there are many Midwestern firms that have plants in Southeast Asia, or other parts of the world, and the fact – the value of the dollar is so high has made it difficult to export those products – the value of the money that you're able to bring back to those countries from other countries is now – as much. And that's really hurting several firms here in the Midwest. Farmers are very concerned about the price of commodities. We have a situation where there's a severe reduction in the demand for the kinds of agricultural products that are produced in the Great Plain states, and the result is that we're seeing a decline in agricultural exports, at least in the value of agricultural exports, which is hurting the farm economies. By and large, the Midwestern economies have not been doing as well as the rest of the nation for about a year now. And as often is the case, when the preconditions for a recession are present, it's the Midwest that feels it first.
ELIZABETH FARNSWORTH: And, Professor Marcus, do you think that the stock market's reflecting some of that?
MORTON MARCUS: Well, the stock market, as others have already indicated, is reflecting a situation where the anticipated earnings of American corporations are going to be down; everyone was saying for a long time, you know, these stocks are terribly overpriced; and now we're seeing those prices come down to where everybody said they ought to be. So we should see a great deal of satisfaction. But I think the day-to-day fluctuations, even though their magnitude seems to be great – 200 points today on the Dow Jones Industrial Average, really doesn't concern people too much, and we're accustomed to roller coaster rides in the summertime.
ELIZABETH FARNSWORTH: Mary Bechmann, what about the fact that a drop in the stock market does take money out, or at least people perceive it as taking money out of their pockets? Has consumer confidence gone down here in the West?
MARY BECHMANN: Well, let me describe it this way. A couple of months ago, you know, in California, in Silicon Valley, a $5 million house in the real estate market would sell within three days with multiple offers over the asking price, and you'd be lucky to even get a private look at the place.
ELIZABETH FARNSWORTH: A house that cost how much?
MARY BECHMANN: $5 million.
ELIZABETH FARNSWORTH: Okay.
MARY BECHMANN: And that you'd have to stand in line with all cash in order to have the privilege of looking at such a palace. Now I think it's safe to say that such a house would probably sit on the market for maybe three weeks, which is unheard of out here in the last couple of years in the real estate market, and it may even go for, my goodness, less than the asking price. So we've had a slowdown, and we've seen things break a little bit, but it's been as though we've gone from 200 miles an hour to 180, instead of from say 100 to 30. So it's fine tuning a little bit more than anything else at this point.
ELIZABETH FARNSWORTH: Gary –
MORTON MARCUS: -- on the west coast who have $5 million – you can buy an entire county in the Midwest for that.
MARY BECHMANN: That's right.
ELIZABETH FARNSWORTH: Well, Morton Marcus, while you're there, what about consumer confidence where you are?
Mr. Marcus: "I haven't heard of many people jumping off of even one-story buildings."
MORTON MARCUS: I don't think consumer confidence is hurt very much. I think the instability in the stock market makes people a little less effervescent than they had been. There's less bubbling. But most people see the stock market as a long-term investment that they've engaged in; they're not inclined to move money around very quickly; they have a tendency to understand that fluctuations in the market are normal; and it's not being taken as a serious matter. I haven't heard of many people jumping off of even one-story buildings.
ELIZABETH FARNSWORTH: Gary Shoesmith, you touched on this already, but tell me more about consumer confidence in your area.
GARY SHOESMITH: Well, in the Southeast I think the example of the housing market is a good one as far as drawing a distinction between the West Coast and what's going on here. Housing activity is very strong here in the Southeast, across most of the states, Tennessee may be an exception, given the problems that they're having in manufacturing, but by and large, especially with the baby boomer generation aging and retiring and moving South, buying property along the coast, construction activity is very strong. A lot of golf courses are going in, and the communities that go with that, so here in the Southeast housing activity is very strong, especially along the coast but also inland as well.
ELIZABETH FARNSWORTH: So for you too there's something of this disconnect between what's happening in the stock market and the real – what some people refer to as the real economy?
GARY SHOESMITH: Well, I think that this volatility would discourage some people from taking – you know – a very large chance, exposing themselves to a high degree of debt at this time. At the same time, a lot of investors have taken money out of the stock market to do just the kinds of things that we're talking about, to buy new houses, to buy a boat, to buy a new car. At this point with the volatility I think consumers will be a little bit more hesitant to make a big commitment, but still activity here in the Southeast is very strong and so far I wouldn't say the stock market has made a very big impact.
ELIZABETH FARNSWORTH: And Tom Fullerton, in the little time we have left, how about consumer confidence in your part of the country?
TOM FULLERTON: Consumer confidence in Texas as a whole remains fairly robust. In border regions, border metropolitan economies such as El Paso and Laredo, there's more concern over financial market volatility in Mexico than there is over financial market volatility on Wall Street, and the reason is that peso weakness; if there's another large scale of the peso in Mexico, that will translate into weaker retail performance on the North side of the river.
ELIZABETH FARNSWORTH: Okay. Well, thank you all four very much.
TOM FULLERTON: Thank you.