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U.S. economy may slow down a bit in 1998

SHARE U.S. economy may slow down a bit in 1998

More than the usual amount of uncertainty clouds the outlook for the U.S. economy in the new year after financial storms pelted Asia in 1997.

The United States, without doubt, will feel the impact in 1998. But most economists think the spillover will only dampen, not douse, the U.S. economy.They see 1998 as a sort of 1997 repeat - good but not quite as good. There'll be somewhat less growth, possibly a bit more inflation, perhaps slightly higher unemployment.

As a result, the current business expansion, finishing its seventh year of uninterrupted growth, should become the second-longest in U.S. history by the end of the year.

Of course, forecasting is never a sure thing: Most analysts thought an economic slowdown would come in 1997. And they could be just as wrong about 1998.

"It would be very foolish to ignore the risks for major economic disruption," said economist Norman Robertson of Smithfield Trust Co. in Pittsburgh. "The Asian problems are by no means resolved."

Turmoil has spread from smaller economies such as Thailand's to Korea's, the world's 11th largest. The second-largest - Japan's - is struggling. Will the contagion spread to the biggest - the United States'?

The primary conduit of weakness would be trade. Exports account for nearly an eighth of total U.S. economic output. Pacific Rim countries buy 30 percent.

That said, U.S. prosperity is so robust and broad-based that most analysts have a difficult time believing a recession is near.

"Perversely, the slowdown in the near term makes a recession less likely in 1999 or 2000," said economist David Wyss of DRI-McGraw Hill in Lexington, Mass.

That's because, absent the dampening impact of Asia, the Federal Reserve probably would raise interest rates to induce a slowdown with the aim of keeping inflation tame.

The Asian crisis should shave about a half percentage point off U.S. growth, Wyss said.

A consensus forecast shows:

GROWTH - Economic output should expand a moderate 2.5 percent in 1998 after an unexpectedly robust pace of about 3.7 percent in 1997 - the best since 1988. High debt levels and a volatile stock market should restrain spending by American consumers. But, supported by low interest rates, housing construction and business spending on new equipment should remain strong.

INFLATION - Consumer prices rose only about 1.8 percent in 1997. Inflation outside food and energy, 2.1 percent, hasn't been lower since 1965. Many analysts believe the rate will inch toward 2.5 percent next year as companies seek to recover the cost of higher wages. Others see inflation holding below 2 percent.

LABOR - The nation's unemployment rate, at a 24-year low of 4.6 percent in November, should edge still lower in early 1998 before creeping back toward 5 percent. Real wage gains - adjusted for inflation - hit a 20-year high of nearly 2.5 percent in 1997 and could be even better in 1998.

TRADE - The trade deficit, at about $115 billion in 1997, easily could swell beyond the record 1987 trade gap of $153 billion if American companies can't compensate for lost Asian exports by selling more to Europe and the Americas.

INTEREST RATES - Economists are divided over the Federal Reserve's next move. It will either cut interest rates to compensate for the drag from Asia or raise them to prevent increasing wages from causing greater price inflation.

"At this point the safest thing is to assume it will do nothing," said economist Robert Dederick of Northern Trust Corp. in Chicago.

That implies banks' prime lending rate will stick around 8.5 percent and 30-year, fixed-rate mortgages should hover around 7 percent, give or take a half percentage point.

STOCK MARKET - Strong profit growth in 1997 supported a 23 percent gain in the Dow Jones average of industrial stocks. Optimistic analysts say the Dow could climb an additional 10 percent in 1998. Pessimists, noting that nearly a third of large American companies draw significant earnings from Asia, foresee a sharp correction.

RECESSION - Barring unseen new shocks, the expansion will reach its 93rd month in December, beating the 1982-1990 recovery. Economists believe there's a good chance it will become the longest expansion ever in February 2000, surpassing the 106-month recession-free run from 1961 through 1969.

"I believe this will go down in the record books as one of the most prosperous periods of U.S. economic history," said economist Allen Sinai of Primark Decision Economics.