(FORTUNE Magazine) – There's been an odd disconnect in the economic news this winter. Nearly all the news about the U.S. economy has been positive--sometimes wildly so: The expansion is in its seventh year (something that's happened only twice before); inflation and the budget deficit have vanished; unemployment is lower than it's been in a generation; and GDP growth for 1997 was outstanding. But the news about what might affect the U.S. economy has been awful, especially the shocking and continuing economic implosion of East Asia. Might the U.S. catch the "Asian flu," as the headline writers put it, and fall into recession or even deflation--something that hasn't happened since the Great Depression?

The answer is, almost certainly not, unless things in Asia get a whole lot worse than they are today. To begin with, the "flu" metaphor is a bad one: Asia's economies weren't healthy one day and suddenly struck down the next by a mysterious virus. The more we find out, the clearer it is that a lot of risky, unsustainable economic behavior was going on over there. The booming U.S. economy, on the other hand, has stayed remarkably free of such excesses. "If these problems had to come," Deputy Treasury Secretary Lawrence Summers said in a recent interview, "it's fortunate that they're coming at a time when the American economy is in very good shape."

The most direct way that Asia's problems will hurt the U.S. is by slowing exports. Sluggish Asian growth and the dollar's rise compared with Asian currencies will reduce exports to Asia by some 13% this year, according to a country-by-country analysis by Salomon Smith Barney. While 13% may sound like a big deal, it's not really. Despite all the talk about it, the U.S. economy isn't particularly globalized. Exports are only 12% of U.S. GDP, and exports to Asia are only about 33% of total exports. Thus the net effect of an Asian export slowdown is 13% x 12% x 33%, which comes out to about 0.5% of GDP.

Most mainstream economists, in fact, figure that the net effect of the Asian contraction will be to slow U.S. GDP growth by between 0.5% and 1%, and that the economy will keep growing, with GDP up 2.5% in 1998. Summers thinks the 0.5% number for Asia's impact is about right. "If the Asian situation stays contained," he says, "which is what the countries involved, we, and the IMF are all trying to do, there will be a noticeable impact on trade. But there should not be any interference with the basic momentum of the current economic expansion."

What about deflation--the less obvious but much more scary-sounding way that Asia's troubles could hurt the U.S.? The weakest Asian nations are indeed seeing the prices they charge for their goods plunge in international markets--because of the sudden devaluations of their currencies. These nations, the theory goes, could "export" deflation to the U.S. in two ways. The first is that falling prices of Asian goods sold in the U.S. will directly lower the U.S. price level. Again, the fears are overblown. Services are a bigger part of the U.S. economy than merchandise--consumer expenditures on services are running at about $3.3 trillion per year, vs. $2.3 trillion for goods--and service prices have been rising. Moreover, only about 10% of the goods sold in the U.S. are imported from Asia.

The second way that Asia could "export" deflation is that Asian manufacturers, forced to sell their products for lower prices, could pump up their production and create a global glut of goods, in turn forcing down prices for competitors in the U.S. While this will be a problem for some companies, it's unlikely to have a big impact on overall prices. Many things manufactured in Asia don't compete directly with products made in the U.S. No matter how big a glut Korean carmakers create, for instance, prices of big U.S.-made sport-utility vehicles won't suffer.

While the deflation scare makes for lurid headlines, research economists and economic forecasters doubt deflation will occur in the U.S. (For a view from FORTUNE columnist Paul Krugman, see "Don't Worry About Deflation," later in this section.) A more likely danger for 1998 is that old, less trendy nemesis--inflation. If Asia's impact on the economy is as mild and transient as most economists think, GDP growth could begin sizzling later this year, as it did in 1997. The result could be even tighter labor markets, rising wages, inflation, and in turn, higher interest rates.

The biggest threat to future expansion would arise if an Asia-induced deterioration of economic conditions around the world were prolonged and deep enough to erode corporate profits. A profits slowdown could drive down stock prices, which in turn would depress consumer confidence and spending. It could have an even more depressing effect--and surely raise the odds of a recession--if it began to undermine business investment. The backbone of the long expansion of the 1990s has been the extraordinary strength of business investment, which the chart below shows. "It's a virtuous cycle," says Mickey Levy, chief economist at NationsBanc Montgomery Securities. "Profits rise, investment goes up, productivity improves, and new capacity is created."

As long as corporate profits allow business investment to remain strong, the expansion can shrug off external shocks like the Asian contraction. But once business investment falters, recession will threaten, and the old list of woes the U.S. hasn't had to worry about for years--rising unemployment, inflation, and falling incomes--will all come crowding back.

REPORTER ASSOCIATES Lenore Schiff and Maria Atanasov