War spurs new, optimistic view of economy War in the Gulf

January 20, 1991|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON — Washington--The surprising and steep drop in oil prices at the start of the Persian Gulf war should result in a mild and brief recession, according to the dominant view of economists.

But a second group believes the recession will linger on, with unemployment rising for at least a year, as the nation wrestles with deep-seated economic problems related to the weakness of the banking industry, huge corporate debts and the sharp drop in real estate values.

Once the war ends, even if that occurs quickly, the euphoria will fade and these troubles will surface in the public's mind again to dog consumer confidence, according to this second school of thought.

But the demonstration of air prowess by the United States and its allies and the failure of Iraq to knock out Saudi oil facilities appear to be leading most economists to take a new and more optimistic look at the economy.

Joining this reappraisal is Federal Reserve Chairman Alan Greenspan, who told The Wall Street Journal following the initial air successes that if the declines in oil prices and interest rates are sustained, they would buoy the economy by improving consumer spending on housing and other big-ticket items.

After a roller-coaster week that included a historic $10.56 per barrel decline on Thursday, crude oil for delivery in February closed last week at $19.25 on the New York Mercantile Exchange, down $8 from a week earlier.

"Of course, the extraordinary decline in oil prices, assuming they stay down, would clearly have a major effect on consumer real purchasing power," said Mr. Greenspan.

The huge rise in oil prices stemming from Iraq's invasion of Kuwait last August has amounted to the equivalent of a $60 billion tax increase on consumers, draining their ability to buy items other than gasoline and other energy supplies.

The economy's slide gained momentum early last year as the real estate market weakened and a credit crunch took hold. But it accelerated after the invasion, when consumers scaled back purchases in the face of this added burden at the pump. Also, most of the funds spent on fuel flowed out of the country to foreign oil producers, which further weakened the economy.

The administration and economists generally believe the economy shrunk significantly in the final three months of the year.

So a sharp decline in oil prices, which amounts to a tax cut, is likelyto change consumer spending patterns, according to most economists, making them more confident the economy will recover from the recession by late spring or summer.

"All we really need to bring us out of recession is a rebound in consumer confidence," said Cynthia Latta, senior economist at DRI/McGraw Hill. Consumer spending accounts for two-thirds of the economy.

Beyond this key economic prop, Allen Sinai, chief economist of the Boston Company, said the sharp decline in oil prices and interest rates would boost the economy by leading to "better inflation numbers and improved corporate profits in the United States and other oil-consuming nations," which are major buyers of U.S. products.

Mr. Sinai attributed the sharp stock market rally in part to "the clear U.S. victory of air power" at the outset of the war because that meant that vital Saudi oil production facilities would be largely spared.

The economy should also get a lift from spending to conduct the war and replenish military supplies and fuel, said Donald Ratajczak, an economist at Georgia State University.

"We will want to replenish our stockpiles," he said. "We have already been spending about a quarter of a billion a day on the war."

Before hostilities began, the government estimated the gulf commitment would cost $30 billion. Private military analysts said the daily cost of conducting the war could amount to $1 billion to $2 billion, which would benefit some sectors of the defense industry.

But a number of experts who had a gloomy outlook on the economy before the United States attacked Iraq are expressing doubt that the economy will pull out of the recession quickly, even should the war be short.

"You just don't get a strong economy out of this," said Kenneth Goldstein, an economist at Conference Board, a New York-based non-profit, non-partisan business research group, which conducts a monthly consumer confidence survey. "The unemployment rate is going to go up for the next three to five quarters."

His pessimistic outlook was based on the continuing problems in real estate and banking and the added obstacle to a recovery from a likely upturn in interest rates once the economy shows any fresh signs of life.

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