Onslaught of gulf war brings some economic cheer

January 30, 1991|By JANE BRYANT QUINN | JANE BRYANT QUINN,1991 Washington Post Writers Group

NEW YORK -- Two pieces of good economic news emerged from the gulf war's opening days: The world will most likely continue to have an adequate supply of oil. And interest rates are lower now then they were a couple of weeks ago.

This means lower inflation, easier credit and some debt relief. The recession is quite likely closer to its end than its beginning -- passing, perhaps, as early as spring and no later than summer. "Worst-case scenarios don't make sense any more," says economist David Rolley of the forecasting firm DRI McGraw-Hill in Lexington, Mass.

This good cheer, however, assumes that the hot war subsides within a very few weeks. If Saddam Hussein has an ace up his sleeve or the ground troops get bogged down-- in sand or in a chemical storm -- the pain on the home front might be protracted, too.

In a long war, oil prices might move up again. Deficit spending on war production would signal more inflation ahead. The critical decline in interest rates would come to an end. Consumer confidence might take another dive.

Some war damage is already apparent in the economy, as worried travelers stay home, airlines and hotels lose customers, and businesses put international deals on hold.

Nevertheless, it's hard to think of an industry that can't be helped by the current drop in interest rates and oil prices.

Economist Roger Bird, a vice president of the forecasting firm WEFA Group, is especially optimistic about the manufacturing companies that produce for export (heavily concentrated in the Midwest).

Europe has been a steady buyer of U.S.-made machine tools, business electronics and other capital goods.

Cheaper oil supplies will cushion Europe's downturn and increase its appetite for shopping in the United States, he says.

Oil prices might still jump around, but John Lichtblau, chairman of the Petroleum Industry Research Foundation, thinks they won't rise much.

The entire world stocked up on crude for fear that the Saudi fields would close. When they didn't, the oversupply spilled into the market, driving prices -- in just one day-- from $32 a barrel down to $21, a historic drop.

At that price, gasoline at the pump should fall 20 cents a gallon eventually, says Ben Brockwell, editor of the Oil Price Information Service. Heating oil could drop by 10 cents a gallon almost immediately and 45 cents by next September.

Slower inflation and easier money should lower interest rates even further, says Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles. He puts the prime business lending rate at 8.5 percent by spring, down from 9.5 percent today.

If he's right, that means lower costs for businesses whose loan interest rates are pegged to the prime. Such a broad drop in rates should also bring out strong demand for home-mortgage money.

Jordan's interest-rate forecast falls on the optimistic side. Even so, most economists now believe that barring a long and expensive war financed with vast amounts of deficit spending, the prospect of much higher rates is remote.

If you're living on income from your savings, consider switching some of your money out of floating-rate money-market mutual funds or bank accounts. The yield on short-term investments is likely to shrink. An intermediate-term Treasury or certificate of deposit, with a maturity of five years or so, is a better bet for protecting your income.

As for U.S. stocks, it's unknowable whether a new bull market has begun.

At this writing, stocks have been strong since the day that the shooting started, reflecting the general expectation that lower oil prices and interest rates will soon show up in higher corporate profits. Doubters, however, point to the lingering recession as reason to think that stocks are likely to slide again.

Long-term investors should disregard this chaff. Stick to a regular program of buying and holding stock-owning mutual funds. Ten years from now, you'll be glad you did.

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