Associates Present Latest Product Offerings to Trailer Manufacturers TWENTY TTMA Associate members demonstrated their latest products and services during presentations April 24. With PowerPoint-loaded computers clicking and videotapes rolling, the suppli

June 1, 1999
ECONOMIST Lawrence Chimerine analyzed where the global economy has been, what is happening to it now, and where it is going. The outlook, delivered at

ECONOMIST Lawrence Chimerine analyzed where the global economy has been, what is happening to it now, and where it is going. The outlook, delivered at the Truck Trailer Manufacturers Association convention in San Antonio, is for continued prosperity-but also for continuation of the extremely competitive business climate. Chimerine is the managing director and chief economist for the Economic Strategy Institute. He addressed the 1998 TTMA convention and began this year's address with a review of the key points from last year's message. Among them: o Asia was turning out to be a crisis far worse than anyone expected-even those who recognized the imbalances in Asia. "In my wildest dreams, I never thought we would see the collapse of economies that we have seen," he said. o Despite the severity of the crisis in Asia, it probably would not have a substantial effect on the US economy in general. o In order to prevent Asia from having a wider impact on the United States, a number of things had to be done. The International Monetary Fund would have to reverse its course of placing austerity measures on the Asian countries, the United States would need to reduce interest rates, and other countries would have to cut interest rates to stimulate demand. The Current Economy Chimerine summarized the global economic situation as follows: o Almost all emerging countries around the world are suffering. What began as a sizeable recession in Asia last summer spread to Russia, Latin America, and the Middle East. Many of these countries are in recession or major recession. Those not in recession have experienced significant slowdowns in the rate of economic growth. o As expected, the US economy continues to hold up remarkably well. This already is the second-longest uninterrupted expansion in the history of the United States. If it continues for eight months, it will be the longest. o Japan is still weak, Canada has slowed, and Europe has showed signs of softening. Even large, developing countries have not done well over the past 12 months. The United States has been the exception. "I remain extremely optimistic about the future of the US economy, and I am more optimistic about the rest of the world than I have been at any time over the past year or two," he said. A Look Back Chimerine traced the Asian crisis to an export-oriented model for economic growth. "The crisis in Asia had its roots in the economic strategy that almost all countries in Asia have used," he said. "Asian countries structure their economies to generate export-led growth. They keep their domestic consumption down and funnel the resulting domestic savings into their banks. The banks lend the money primarily to manufacturing companies to expand capacity. Most of that capacity goes toward supporting a rising level of exports. These countries keep their domestic markets closed. They don't worry about competition at home, and they can make large profits that can subsidize their exports. They get preferential tax treatments to enable them to compete more favorably in the export market. They tie their currencies to the dollar at a rate that gives them a competitive advantage. This is what many countries have done, and that accounts for their rapid growth during the 1980s and early 1990s." The problem in Asia is that one country like Japan can make this work, but not every country can export its way to prosperity at the same time. Someone has to buy something, and it can't just be the US. "This strategy has caused huge overcapacity," Chimerine said. "Asian countries began to compete among themselves for the same markets because there was not enough to go around for all of them. That is what caused the crisis." The crisis started to spread to Brazil, Russia, and other countries for several reasons. Chimerine cited the following: o Foreign investors who got badly burned when Asian economies and currencies began to collapse withdrew capital from other emerging countries as well. This put upward pressure on the interest rates in these countries. o The crisis in these economies was followed by a collapse in commodities prices. This devastated the economies of emerging market countries. Weathering the Storm So far, the United States has been able to withstand these forces and continue to grow. Chimerine gave three primary reasons: o While trade is important, it accounts for no more than 20 to 25% of gross national product (GNP). Even with the recessions overseas, 75% or more of the US economy still comes from domestic industries. Retail, housing, construction, financial services, and health care all are relatively immune to global issues. It would take a complete collapse of the world economy to cause a recession in the United States, he said. o When the Asian crisis began, the fundamentals that were driving the US economy were excellent. The unemployment and inflation rates are low, and purchasing power is high. Interest rates have been trending lower throughout the decade. Because of the growth in 75% of the US economy, the decline in the trade-sensitive segment has been offset. o The crisis in Asia actually strengthened demand in the United States. That is because the capital that was pulled from other countries went into the US economy, specifically the bond and stock markets. It also pushed down interest rates, making housing more affordable. Eight million American families refinanced their homes last year, saving an average of $110 per month. "A lot of people responded to those savings by buying a new car or making other major purchases," Chimerine said. "Despite the gloom in Asia, the United States auto industry had its best year in decades last year." Asia created an uneven economy of winners and losers, Chimerine said. Some of the areas of the economy that are suffering include agriculture, some commodities, and trade-sensitive manufacturing industries. By contrast, all segments of the economy were growing a couple of years ago. Future Global Expansion Chimerine believes that the groundwork has been laid for an overall global economic expansion that will cover the next couple of years. "The process has already started in some parts of the world and will start soon in others, he said. "This points to continued growth without recession and a return to the balanced growth that we had 18 months ago." Chimerine believes the worst is over in Asia and expects to see economic expansion there. He cited these reasons: o Korea, Thailand and Malaysia all have bottomed out and are starting to recover. The climb will be slow, however. These countries have been in deep recessions, and it will take years for them to return to where they were when the recessions started. o Financial market indicators have become very positive, suggesting that this process will continue. Interest rates have come way down after huge increases over the past few years. Stock markets are recovering, and their currencies are rebounding. o Capital is beginning to flow back into Asian countries. Investors are more confident because they believe current economic reforms will help prevent the reoccurrence of similar crises. Reforms include fixing banking problems, moving away from reliance strictly on exports, and finding ways to stimulate domestic demand. o Japan is still very weak. "The Japanese have serious structural problems. But they, too, are beginning to institute reforms, Chimerine said. "I believe that by mid or late summer the Japanese recession will bottom out, and the economy should begin an expansion that will continue over the next several years. This is very important because Japan has the second-largest economy in the world. It will be much easier for the rest of Asia to recover if Japan is doing better." o China is stimulating its domestic demand by cutting interest rates and by using its substantial surplus to make housing more affordable and to improve its infrastructure. o The International Monetary Fund has changed its policies, helping countries restructure their debts and advancing new loans for infrastructure spending. "The odds are very high that the worst is over in Asia," Chimerine said. "By the end of the year, Asia will be contributing to growth in the global economy instead of dragging it down." Optimism Elsewhere Chimerine pointed to improving conditions in a variety of countries: o Despite the distress in Brazil a few months ago, conditions in the last six weeks have improved dramatically. Interest rates have dropped sharply, and the currency is rebounding. Capital is flowing back into Brazil six months after investors were taking it out. o Conditions also are bottoming out in other Latin American countries. Commodity prices are improving. o Mexico is still growing. By the end of this year, Latin America will be a growth region, Chimerine said. o The Middle East will benefit from an increase in oil prices. "My one concern is Western Europe, but even there, reasons can be found for optimism," he said. "For example, the European central bank cut interest rates a few weeks ago, and more cuts are coming. The Germans are considering fiscal stimulus programs because they realize how soft the economy has become. Within a few months, the European economies will pick up, too. "With just a few exceptions, we will see global economic recovery and growth that will extend through the next year or two. This is a markedly better situation by far than we have had over the past 18 months." Additional US Growth The United States should have two or three more years of economy growth without a recession, Chimerine believes-even though history would indicate otherwise. Expansion periods tend to last an average of four or five years before they run out of steam. This current expansion now is in its eighth year. "The old rules of thumb are irrelevant," Chimerine said. "The United States economy has experienced so many structural changes. The three longest expansions all have occurred in the last 30 years. The 1960s had the longest expansion. The 1980s had the third longest, while the current expansion is the second longest." Other signs point to continued economic strength. "Interest rates are low, there are few bottlenecks in the economy, inflation is low, and inventories are in good shape," Chimerine explained. "And with a global economic expansion, our exports should begin to increase again." With recent increases in interest rates and oil prices, consumer spending should not increase as much over the next 12 to 24 months. But exports and commodities, which have done poorly, will rebound, he believes. "It sounds too good to be true, but it is true in my opinion," Chimerine said. "The odds overwhelmingly support that type of scenario." However, some things could go wrong that would affect the economic outlook, he said. Among them: o Interest rates. Some increase in interest rates is to be expected. The flow of capital from foreign investments into the US bond market helped to make interest rates artificially low. Upward ticks in interest rates should not be seen as the beginning of an upward trend. "In my opinion, the next move may be downward," he said. "With inflation as low as it is, there is no reason to raise interest rates. Doing so would only make the dollar stronger. The Federal Reserve raises interest rates to combat inflation. But there is no inflation in this economy, no signs of inflation, and no signs of any sign of inflation." o The stock market. Some stocks are overvalued, and the market has the same uneven pattern of prosperity as the economy in general. "A lot of stocks, particularly the big cap stocks, are overvalued," he said. "A huge number of stocks are undervalued. Overall, the market is not overvalued-it is reflecting the huge productivity revolution that has been going on in American industry." Words of Caution Chimerine did have some words of caution. "Because of the investment Americans have made in stocks, a severe drop in the market would affect consumer confidence and put the economy at risk," he said. "An unseen event could unnerve the market and cause a decline, but the odds of that happening are not more than 10% to 20%." o Trade. Support for free trade in this country is eroding because of the closed market policies of other countries. The silver lining of the crisis in Asia is that it will force Asian nations to reform their trade policies. US exporters should have a better opportunity to sell into Asia than they did before the crisis started. What This Means Even with a good economy, it is still difficult to be in business today, Chimerine said. "The economy is extraordinarily competitive," he declared. "I work with hundreds of companies, and I don't know of anyone who is developing business plans on the assumption that they will be able to raise prices. Instead, they are searching for costs to control and for new ways to be more productive." Chimerine offered the following advice: Selectivity will be important. Some markets will be better growth opportunities than others. Being successful today requires identifying the most successful markets for your company and your customers, he said. Promote productivity. For now, the global economy has too much capacity. As such, demand will be for more technology and productivity-not more capacity, he predicted. Nothing is certain. Before putting any plans into place, understand the risks involved. If things go in a different direction than your assumptions, what will be the effects? Most of all, monitor your business on a regular basis. "The best way to reduce the costs of planning errors is to recognize them as soon as possible," he concluded. "We may not always be able to forecast accurately, but we should be able to monitor properly."

About the Author

Bruce Sauer | Editor

Bruce Sauer has been writing about the truck trailer, truck body and truck equipment industries since joining Trailer/Body Builders as an associate editor in 1974. During his career at Trailer/Body Builders, he has served as the magazine's managing editor and executive editor before being named editor of the magazine in 1999. He holds a Bachelor of Journalism degree from the University of Texas at Austin.