Economic Report President

with its banking problems, and open its markets and deregulate itseconomy. Japan’s performance will help determine the prospects forAsia’s recovery.EFFECTS OF THE EMERGING MARKETS CRISIS ONTHE UNITED STATESMACROECONOMIC EFFECTSThe United States enjoyed strong economic growth before the onsetof the Asian crisis and has continued to do so since. But the crisis hashad an impact, both real and financial. One consequence has been amarked decline in net exports and a widening of the trade deficit. Thegrowing trade deficit (Chart 6-3) is largely attributable to three factors:faster income growth in the United States than in most other industrialcountries, which raises imports; outright contraction in Japan andmuch of the rest of East Asia, which cuts U.S. exports; and an appreciationof the dollar in both nominal and real terms relative to bothEuropean and Asian currencies, and particularly the yen (from mid-1995 until September 1998). Since the summer of 1998 the dollar hasdepreciated against the yen, but the fall of the dollar against the otherG-10 currencies is still modest on a trade-weighted basis (Chart 6-4).Two sectors adversely affected by the crisis were agriculture andmanufacturing. Shrinking exports and low prices (attributable partlyto the financial crisis, and partly to large global supplies of agriculturalcommodities following bumper harvests), on top of bad weather insome regions, led to a fall in farm incomes. In manufacturing, bothexport industries and industries that compete with imports sustaineddamage. The commercial aircraft industry, for example, suffered fromthe fall of exports to Asia. The steel industry and the textiles andapparel industry have come under import pressure as the dollar’sappreciation reduced the price of imports from the crisis countries. Asdiscussed in Chapter 2, U.S. financial markets also felt the impact, andfinancial institutions have suffered losses on their emerging marketloans and investments.The appreciation of the dollar since 1995 (illustrated in Chart 6-4)also had a number of beneficial effects at home. Import prices havefallen, especially for oil and other commodities, contributing to thedrop in inflation and improving the U.S. terms of trade (Chart 6-5).The terms of trade is a measure of the prices at which we sell our goodsabroad, relative to the prices we pay for imports. An increase in theterms of trade translates into increased purchasing power of U.S.goods in world markets and higher real U.S. income. A strong dollarand subdued inflation have also supported lower interest rates,both short and long term, benefiting households, firms, and otherborrowers.253