A Guide For The Confused

READING RECENT CONGRESSIONAL TESTIMONY BY Federal Reserve chairman Alan Greenspan, I had a scary thought: he doesn't know any more than I do. By this, I don't mean to compare myself with Greenspan. He's forgotten more about the economy than I'll ever know. Beyond that, the Fed has a staff of 228 economists and is constantly briefed by companies, banks and governments about individual markets and industries. What's sobering is that despite these advantages, Greenspan still seems genuinely baffled by the economy's dazzling performance and its future direction. Precisely. The old adage now seems to apply: if you're not confused, you don't understand the situation.

On the one hand, the U.S. economy is booming beyond belief. In the past year it has created 3.1 million jobs; the unemployment rate (4.6 percent in February) hasn't been lower since March 1970. Measured inflation is declining. In the past year the consumer price index has risen only 1.6 percent. Consumer confidence is at lofty heights; the Conference Board's index touched 138 in February (1985 equals 100), a level not seen since the late 1960s. On the other hand, the news from Asia isn't getting better. China's economy is slowing; Japan may slip into a recession (a drop in output). Indonesia and the International Monetary Fund are in a virtual state of war.

Including China and India, Asia represents about 30 percent of the world economy. Yet its troubles haven't spoiled American spending or spirits. One explanation is that the benefits of the crisis have come before the costs. The biggest benefit has been lower interest rates, which have triggered a surge in mortgage refinancings. Frightened by Asia's problems, global investors shifted funds into U.S. bonds and mortgage securities. Bond prices rose; interest rates dropped. Investors accepted lower interest rates in exchange for more safety. In early 1997, interest rates on 30-year fixed-rate mortgages averaged almost 8 percent; in 1998 they've hovered around 7 percent.

Economist David Lereah of the Mortgage Bankers Association estimates the resulting explosion of mortgage refinancings will total about $400 billion in 1998. On a $120,000 loan, someone going from 8 percent to 7 percent would save nearly $1,000 a year. Lower rates have also sustained a high level of home buying and selling. For 1998, Lereah expects 4.24 million existing homes to be sold, a record. Americans are moving into more appealing homes and, in the process, doing a lot of redecorating and renovating.

The second big benefit from Asia has been the plunge in oil prices. Since early 1997 they've dropped from $25 a barrel to $15. The United States now consumes 6.8 billion barrels of oil a year, says economist Michael Canes of the American Petroleum Institute. At lower prices, consumers would save almost $70 billion. Average gasoline prices have dropped to about $1 a gallon from $1.20 a year ago; they could go lower. Part of the gain is a wealth transfer from U.S. oil producers to U.S. consumers, but the gain on our imports--half our oil use--is pure windfall. Asia's crisis has cut demand, and ""the cartel is falling apart,'' Canes says. (The cartel is the Organization of Petroleum Exporting Countries.) Countries violate their OPEC quotas. Supply rises, demand softens; prices fall.

America's careless confidence now contrasts dramatically with Asia's deepening fatalism. Economist Marc Faber in Hong Kong has long been one of the region's prominent pessimists. Indeed, he calls his regular commentary ""The Gloom, Boom & Doom Report.'' But even he's stunned. ""The Asian crisis has left me shellshocked,'' he writes. ""I have never [seen] such a total economic breakdown and massive destruction of wealth.''