War: hell for the economy HD: Experts foresee soaring oil prices, plunging market

December 02, 1990|By Ted Shelsby

It's not the best place to fight a war.

That is what economists and stock analysts around the country are saying of the possibility of an eruption of shooting in the Persian Gulf, home of the world's richest oil fields.

Oil and bullets don't mix, they say, and when the bombs start going off their shock waves will ripple through the U.S. economy and be felt by the average person on the streets of Baltimore and every other city and town in the country.

"A war could be devastating" to the economy, says Kenneth Goldstein, an economist with the Conference Board, a New York-based non-profit and non-partisan business research group. "It would be the nail in the coffin of a deep recession."

There is no assurance that it would be a swift and tidy conflict, Mr. Goldstein says, and the picture he paints is not one that they make John Wayne or Rambo movies from. It's more like something from the pages of John Steinbeck's classic novel "The Grapes of Wrath."

Mr. Goldstein sees oil prices shooting up to an all-time high of $100 a barrel and consumer confidence falling to an all-time low in the event of a war.

That would be a deadly combination, as far as the economy is concerned. It could push unemployment up to 7.5 percent, maybe even into double digits, with inflation in the "7 percent plus" range.

Consumer spending, a big factor in the country's economic growth over the past decade, would practically dry up over night. "Consumers would keep their hands in their pockets," says the Conference Board economist. "They would stay away from the malls."

The auto industry could be so severely affected that dealers might refer to the current period of lackluster sales as the good old days.

Sticker shock would not be limited to the showroom -- it would be something motorists experienced when they pulled into the service station. Oil at $50 a barrel, which a number of analysts are forecasting, would add $1 to the price consumers are now paying for a gallon of gasoline, says Delos Smith, another Conference Board official.

If the price of oil jumps to $100, he says, "you add another $3 or $4 on top of that. We're talking $5.50 to $6 a gallon."

"The government may not allow that," he says. "It may ration gasoline, or lower the federal tax or start pumping from its reserve supply. That's a theoretical price, based on no one intervening. That's unlikely, but it's a possibility."

The suffering wouldn't stop there, says Mr. Goldstein. "Wholesale trade would drop sharply, as would retail trade -- furniture, appliances, clothing, entertainment, travel. . . .

"Businesses considering expanding, refurbishing or modernizing their plants to increase production would put those projects on hold."

The construction industry would be another victim. Cynthia Latta, a senior economist with DRI/McGraw Hill, an economic consulting firm in Lexington, Mass., says housing starts would "be hit very hard" and would drop well below today's already depressed levels.

Despite his gloomy forecast, Mr. Goldstein never used the word depression during an interview last week. But Stephen S. Fuller, a George Washington University professor, did. A downturn in the economy could feed of itself, he says, and he warns that the world economies would go into recession one after another, leading to a worldwide depression.

Assuming that the war would not last more than six months, says Dr. Fuller, chairman of the urban planning and real estate development department, it would take a year to 18 months after the shooting stopped before the United States' economic See WAR, 11C, Col. 1WAR, from 1Cwounds could be healed and business returned to normal.

On the flip side of those gloom-and-doom forecasts, some economists say there could be brighter side to a Middle East war -- especially if it's short war, something along the lines of two weeks. There could even be some benefits to the economy, they say, especially in states such as Maryland that have close ties to the defense industry.

There would be no boon to Maryland's economy, says Dr. Fuller, "but it is possible the state could benefit marginally" because of its defense-related activities. Maryland historically ranks on the Pentagon's list of the 10 top states receiving Defense Department contracts.

It would be nothing like the war-production buildups of World War II, Korea or Vietnam, but Byron K. Callan, a defense analyst with Prudential-Bache Securities, says the Pentagon might get some extra funds over the next few years to replace any equipment lost on the battlefield.

One beneficiary, he says, could be AAI Corp. in Cockeysville, maker of a small pilotless aircraft equipped with a television camera that is used for spying on enemy troop movements and as a forward observer to direct battleship and artillery fire.

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