Asia's Good News Is Lower Prices--and That May Be the Bad News Too

By TOM PETRUNO

May 24, 1998 12 AM PT

Waiting for Asia’s financial calamity to have a meaningful effect on the United States this year, many American economists have unwittingly played the roles of Estragon and Vladimir, the tramp heroes of Samuel Beckett’s absurdist play “Waiting for Godot.”

Godot, of course, never shows up.

Common wisdom notwithstanding, however, the Asian mess is not America’s Godot. It is, in fact, washing onto U.S. shores with greater intensity each month. And the worst--or the best, depending on your viewpoint--may be yet to come.

No less than Federal Reserve Board Chairman Alan Greenspan, usually given to understatement, warned Congress last week that Asia’s impact on the U.S. economy is “only now just being felt.”

That was clear in last week’s U.S. trade deficit report for March. The long-predicted surge in low-priced Asian imports--cheapened by the region’s devastating currency devaluations relative to the dollar over the last nine months--arrived with force in March.

The result: The total U.S. merchandise trade deficit with the rest of the world jumped to $20.2 billion for the month, up 9.2% from $18.5 billion in February.

“U.S. exports [to Asia] are falling at a rapid rate, while the United States is sucking in cheap Asian imports at a double-digit pace,” said Edward Yardeni, chief economist at Deutsche Morgan Grenfell in New York.

For American exporters, that is obviously a problem--perhaps not a huge problem right now, but one likely to build. Ditto for American manufacturers that compete directly with Asian companies desperate to sell their now lower-priced goods for hard dollars.

But for consumers--and that’s all of us, of course--Asia’s main effect so far has been to keep strong downward pressure on the prices of many products.

Yet contrary to some of the wild expectations of last fall, prices of Asia-made goods aren’t collapsing across the board. Indeed, many major U.S. retailers insist they aren’t being offered Asian goods at dramatically lower prices compared with a year ago.

But asked to quantify their savings, or lack thereof, most retailers--including giant Wal-Mart Stores Inc.--decline to comment. At best, you’ll hear answers similar to this one, from a Gap Inc. spokeswoman: “We source [goods] from 50 different countries. We really aren’t impacted by fluctuations like this.”

Some Wall Street analysts, noting the retail industry’s mostly robust first-quarter earnings gains, suspect that many big retailers have been fattening their margins--reaping the benefits of lower goods prices, without fully passing the savings on to consumers.

With Americans in a decent spending mood this year, retailers arguably could feel more confident in discounting less. Retailers say, off the record, that that simply isn’t true.

(Some analysts also surmise that retailers such as Wal-Mart, which have stressed the “buy American” theme, may be reluctant to admit it if they are indeed suddenly buying a lot more from Asia.)

In any case, it’s clear that plenty of goods are getting cheaper in the retail marketplace this year thanks to Asia’s turmoil. With more Americans working than ever before, those who have money to spend are finding bargains galore. “It’s a buyer’s picnic out there,” said Susan Sterne, economist at Economic Analysis Associates in Greenwich, Conn.

Consider:

* An overall government index measuring import prices has fallen for six straight months, through April. Import prices in aggregate have fallen 4.9% over the last year. Import prices from Asia’s newly industrialized countries--South Korea, Indonesia, etc.--now are declining at a 7.5% annualized rate, according to economist Yardeni.

* Some of the most significant price deflation has been in the so-called durable-goods area. Retail computer prices, for example, plunged at an annualized rate of 61.3% in the first quarter, according to Sterne’s analysis of Commerce Department data.

That huge drop reflected, in large part, consumers’ soaring preference for under-$1,000 personal computers. But those cheap computers wouldn’t be possible without declining prices of components, many of which are Asia-made.

Likewise, retail prices of videocassette recorders, which are primarily made in Asia, fell at an annualized rate of 12.8% in the first quarter. Camera prices fell at a 6.4% annualized rate.

* Clothing prices, by contrast, have been mixed, despite a 22.5% jump in Southeast Asia-made textile and apparel imports in the first quarter, according to the American Textile Manufacturers Assn.

Sterne’s analysis shows that U.S. retail prices for infants’ clothing fell at an annualized rate of 4.4% in the first quarter. Footwear prices were down 10.6%.

But men’s clothing prices, in aggregate, rose at a 3.4% annualized rate in the quarter.

April data, however, showed prices falling again. In the April consumer price index, men’s and boys’ apparel was down 0.6% overall.

Given the 50%-plus devaluations in key Asian currencies, why aren’t prices of clothing imported from Asia plummeting? Wall Street analyst Maggie Gilliam of Gilliam & Co. in New York, who tracks retail companies, notes that despite the cheapened currencies, Asian clothing makers often must pay for raw materials in dollars, and many of the companies now are forced to pay sky-high interest rates for credit--if they can get credit at all.

What’s more, she said, many U.S. retailers are reluctant to press for lower prices because they have a vested interest in keeping troubled Asian suppliers afloat, for the sake of long-term supply.

There also are quota issues with apparel, under U.S. trade treaties with Asian nations. Those exporters aren’t free to dump unlimited supply, at any price, on the U.S. market.

And with textile and clothing exports already up so significantly from many Southeast Asian countries this year, “it’s clear many of these countries will fill their quotas well before the year is over,” said J. Patrick Danahy, president of the American textile trade group.

Nonetheless, analysts expect lower prices on Asian apparel exports to push overall U.S. retail clothing prices down as the year wears on.

That should occur, in part, because even companies in countries that have not devalued their currencies will be forced to cut prices to compete with the Southeast Asians.

Lonnie Kane, president of Los Angeles-based Karen Kane Inc., which imports all sorts of sweaters from China, says he has seen Chinese prices come down 5% to 10% in the last month or so.

China has not devalued, but its export-driven economy has begun to slow markedly, feeling the competitive effects of lower-priced exports from its Asian rivals.

David Wyss, economist at Standard & Poor’s DRI in Lexington, Mass., believes the full effect of Asia-fueled price deflation has yet to occur. “I think you’ll see most of it in the second half of the year rather than in the first half,” he said.

Even so, he does not predict the kind of deep, global deflationary trend in prices that was much-discussed last fall, when it became clear that Asia’s troubles were severe.

As long as the American economy remains healthy--and Europe’s as well--service price inflation (what we pay for dry cleaning, haircuts, medical care, etc.) may offset much of the weakness in goods prices, leaving consumer prices as a whole up just slightly.

What intrigues--and concerns--many economists is what might happen if, for whatever reasons, the U.S. and European economies should begin to slow later this year.

If that should lead to an acceleration of price discounting to lure buyers--and to rising U.S. layoffs because total demand weakens and American manufacturing companies can’t compete with a flood of cheap imports--the ballooning U.S. trade deficit will become much more of a political hot potato.

The implications for U.S. corporate profits--and thus for the still-high-flying stock market--also are worrisome. As economist Sterne notes, the deflationary winds blowing from Asia “are really good for people who sell things, but they’re bad for those who make things.”

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Where Prices Have Fallen

Here are 10 categories of goods and their annualized price declines at the retail level in the first three months of 1998. The figures reflect what would be the full-year price declines if prices continued to fall at the same pace as in the first quarter.

First-quarter price declines, annualized rate

Computers: --61.3%

Gasoline: --39.7

VCRs: --12.8

Footwear: --10.6

Toys: --9.8

Jewelry: --7.7

Cameras: --6.4

Audio equipment: --5.0

Infant clothing: --4.4

Major appliances: --4.0

Source: Economic Analysis Associates