News Release

March 20, 1998
Contact: Mary Daly (415/974-3186)

East Asia's Effect on the Twelfth District

Current consensus estimates suggest that the East Asian financial crisis is likely to reduce real GDP growth in the nation by 1/2 to 1 percentage point in 1998. As the Twelfth District ships approximately twice as much of its gross product to East Asia as the nation does, some observers have speculated that District growth could decline by twice this much.

In the most recent Economic Letter, Mary Daly, Economist at the Federal Reserve Bank of San Francisco, explains that such a simple extrapolation is inappropriate, because other characteristics of District exports may temper the effect of the East Asia turmoil on District growth.

First, the U.S. and the Twelfth District export a different mix of products to East Asia. Specifically, District exports are more concentrated in high-tech products, aircraft production, and business services than the U.S., and less concentrated in heavy machinery, primary metals, and agricultural commodities.

"These findings suggest that, while District exports have been affected by developments in East Asia, the composition of District exports has served to mitigate some of the disproportionate effect predicted by the District's large East Asian export exposure relative to the rest of the U.S.," writes Daly.

Second, research indicates that the total value of exports shipped from the District may not be created in the District. According to Daly, "The total value of exports represents a collection of value-added components, many of which are produced outside of the District. Thus, the effect of a given reduction in demand for District exports may not be borne entirely by the District. Rather, it will be distributed throughout the U.S."

Daly concludes that "although Twelfth District states are about twice as dependent on exports to East Asia as the U.S., this does not necessarily imply that the East Asian impact on District growth will be twice as large. Other factors, including the District's product mix and the value-added component of exports relative to the U.S., in principle, could serve to mitigate or magnify the District's vulnerability to East Asia, as measured by export exposure ratios. Thus far, these factors appear to be tempering the East Asian impact on District growth, bringing it closer to that estimated for the total U.S."