u. s. economy slowed reflected the global nature of the bursting of the technology bubble and its worldwide transmission through equity markets and manufacturing. in the current slowdown, the implosion of the housing sector is playing the most prominent role in dragging down u. s. gdp growth. as construction utilizes local inputs and results in an output that is not traded internationally, its spillovers abroad are more limited. to be sure, a portion of the decline in domestic demand in the united states has been absorbed by foreign economies as our imports have fallen and exports have risen. however, these indirect spillovers are small compared with the more direct effects that would result from a shock in the tradable goods sector or from one of more global origin. although the financial turmoil triggered by problems in the u. s. housing sector has been more international in scope, in particular with respect to other industrialized countries, its effects on the real side of foreign economies appears to have been limited, at least to date. the recent period also has been one of enhanced demand for commodities and sharp runups in many commodity prices, including for fuels, metals, and food. the actual increase in demand is benefiting many producers of commodities and is helping to offset the effect of weakening of export markets in industrial countries, thus contributing to the resilience of output in many emerging market economies. the third and final point is that structural changes in emerging market economies have helped these countries during the recent period. one change in particular is the strengthening of the policy environment. with improved economic and financial policies, emerging market economies are more flexible and less subject to internal and external shocks that scare investors and disrupt asset markets. inflation rates have come down dramatically since 1995, in part as a result of better monetary policy, assisted in many cases by more flexible exchange rate regimes that allowed monetary authorities to focus more intensively on domestic price stability. in addition, structural progress has been made on the fiscal side in emerging markets. fiscal balances are much improved, and many emerging market economies are running current account surpluses. improvements in the policy environment have helped reinforce perceptions that emerging market assets, on average, are less risky than in the past and are less likely to be sold off in the event of financial disruptions and generalized retreats from risk, such as we have seen since august. as evidence of this, as i noted earlier, emerging market credit spreads have become less sensitive to movements in industrial country corporate spreads, and this trend has been ongoing

a purely economic point of view, losses associated with pension fund commitments should be treated as bygones and thus in principle should not affect the willingness of firms to undertake new capital investments, except to the extent that they affect firms'ability to finance those investments. besides weak profits and the large decline in stock prices, the other obvious negative for the corporate sector is the evident deterioration in aggregate credit quality. the average spreads between yields on risky corporate bonds, such as bbb - rated bonds or high - yield corporate debt, and the yields on safe debt of comparable maturities are currently at elevated levels, equal to or above those seen in the 1990 - 91 recession. many companies have had their debt downgraded by ratings agencies, and corporate bond defaults during 2002 amounted to 3. 2 percent of the value of bonds outstanding, a rate above the 1991 peak in default rates. although these statistics are certainly worrisome, a closer examination reveals several mitigating factors. first, though average spreads of risky corporate debt remain high on an absolute basis, they have recently improved substantially. spreads on bbb - rated corporate debt have come down nearly one - third since their october 2002 peak, and high - yield spreads are down about one - fifth. risk as measured by credit default swaps has also come down substantially over the same period. at least some of the recent marked improvement in perceived default risk and market liquidity must arise from increasing confidence among investors that we have seen the last of the major accounting scandals that rocked the markets during the summer. if more time passes without new revelations of corporate wrongdoing and if the generally high level of risk aversion in markets continues to moderate ( perhaps with decreasing geopolitical risks ), we should see further declines in corporate yield spreads over this year. a second mitigating factor is that much of the measured deterioration in aggregate credit quality is actually concentrated in a few seriously distressed sectors, such as telecommunications, airlines, and energy trading firms, with a few high - profile cases making significant contributions. in particular, yield spreads in the telecom, cable, and media industries reached dizzying heights in mid - 2002, though recently these spreads have fallen quite markedly. remarkably, for the entire year 2002, telecom firms accounted for 55 percent of corporate bond defaults, by value. a similar story, though not quite so extreme, applies to energy and utility firms. when these most troubled sectors are excluded, the recent behavior of financial indicators for the corporate sector