Struggling U.S. Economy is Taking Heavy Toll on Asia.

"AN oasis of prosperity."

That's how Alan Greenspan described the United States two years ago as a financial contagion oozed around the globe, infecting one country after another. The U.S. boom kept the world economy afloat.

Today, the Federal Reserve chairman is waging the fight of his monetary-policy-making life to prevent the U.S. form dragging down everyone else. The effort is looking more and more futile; after six interest-rate cuts, the world's largest economy continues to sink. For a U.S.-centric global financial system, deterioration in the American economy spells trouble ahead.

"For a global economy banking on support from the United States as the consumer of last resort, a painful reality check is now at hand," said Stephen Roach, chief economist at Morgan Stanley Dean Witter & Co. in New York.

Nowhere is that pain more apparent than Asia, a region that's extraordinarily sensitive to U.S. demand. Making matters worse is that the area lacks a clear growth locomotive. Japan has ceased to be Asia's anchor economy. China's promise of one day playing that role is a ways off. The region's other economies are especially sensitive to U.S. information technology spending. That it's dwindled in recent months is hardly news to policy makers in Seoul, Kuala Lumpur and Singapore.

Bleak prospects

Consider Korea, Asia's third largest economy. Its industrial production fell nearly 2 percent in June and stands 2.7 percent below its year-ago pace. In the first half of 2001, Korean industrial production advanced 3.4 percent, a far cry from the 16.8 percent surge in the first six months of 2000. Export growth remains weak -- especially semiconductors -- and construction has lost its vibrance. The U.S. slowdown gets much of the blame.

Export growth also has been sluggish in Hong Kong, raising concerns over China's -- the closest thing Asia has to its own oasis of stability -- performance this year. Elsewhere, like Malaysia, Singapore and Taiwan, demand for goods overseas is raising concern. "In light of the latest round of weakness in U.S. information technology demand just reported in June, Asian growth prospects still look quite depressing to me," Roach said.

The sliding U.S. economy is hurting Europe as well. The drop in U.S. corporate profits is hampering business spending, equity values and, by extension, consumer sentiment. Add to that Europe's unfolding telecommunications problems and you have a recipe for slower growth and financial turmoil.

So, too, Latin America. Argentina's woes would be bad enough; toss in a recession-bound U.S. economy and a stubbornly strong dollar and soon we're talking real problems.

The last thing

Likewise, Asia's situation is challenging enough, without having to worry about the world's economic engine sputtering. Japan, Asia's traditional locomotive, is deteriorating anew.

Prime Minister Junichiro Koizumi is hoping to pass structural reforms to end the nation's decade-long slump. Without help from the United States, Japan's biggest export market, Koizumi' s challenge will become even more difficult.

Japan's modest economic recovery in 1999 owed much to brisk demand for technology equipment, especially from the U.S. Late last year, when demand for computer chips, optical fiber and other building blocks of New Economy businesses evaporated, Japan got hammered. The experience serves as a reminder of just how much difficulty a U.S. recession would cause the world.

Much of the economy's trouble rests in the information-technology capital spending area, which played a huge role in the economy's about-face in late 2000. Roach senses another downleg in one of the weakest links in the U.S. macroeconomic chain. Consider the weakness in durable goods orders in June; the shortfall was concentrated in technology like computers and electronics. Business spending on equipment and software plunged at a 14.5 percent annual rate, the biggest contraction since 1982.

Much has been made about the resilience of U.S. households, which have been spending away even as stocks have plunged and unemployment has risen to 4.5 percent.

Yet spending is vulnerable. At the Fed, policy makers have been cutting interest rates all year in hopes that consumers continue spending. The White House, meanwhile, is sending out tax rebate checks at this very moment to give household confidence a much-needed boost.

What may be getting lost in the translation is a palpable sense that the economy is bottoming. Aside from headlines about layoffs, households are looking at their mutual funds and 401(k) accounts and many are feeling less wealthy. This dynamic helps explain why consumer optimism is sliding.

Such trends demonstrate the difference between conventional wisdom in Washington and how consumers are doing. Fed Chairman Alan Greenspan, for example, argued recently that the threat posed by weaker confidence has diminished since January. "The fabric of consumer confidence hasn't been breached," he told the Senate Banking Committee. "Whatever the risks were back then, they have changed."

For Asia's sake, let's hope the United States can resume its oasis-of-prosperity role soon. It can't happen soon enough.

William Pesek Jr. is a columnist with Bloomberg News.