Economy needs more than fast end to Iraq war

Underlying problems to remain after conflict

Woes predate 9/11 attacks

U.S. is still hung over from 1990s stock bubble

March 23, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

A quick and decisive war with Iraq will give the shaky U.S. economy a short-term boost, but it will not fix the deep and serious underlying problems that are hampering its growth, economists say.

If the war goes badly and drags on for months, the country could plunge into a deep recession, although that is not expected.

But regardless of whether the war is long or short, its impact on the economy will be felt almost immediately.

"It touches the entire economy in a very broad sense," said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, N.C. "In the near term ... consumers are likely to throttle back a bit."

He sees consumers canceling travel plans and staying home to order pizzas and watch movies and the war on CNN.

"It's not like everybody has to do that for there to be an impact," Vitner said.

It is not the short-term drag that worries economists, but rather the problems that have been dragging down the economy for about two years.

"Even assuming a favorable outcome ... the economy is still going to be facing some significant challenges going forward," said Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago.

"What ails the economy today really started before Sept. 11. It started before Iraq became global enemy No. 1. It has to do with the hangover from the great bubble from the late 1990s."

That bubble, which was fueled by the explosion of the technology industry, investor exuberance and unprecedented expansion, ended when the country plunged into recession in March 2001.

Since then, the economy has grown in fits and starts. Now, there are signs of further deterioration.

Job growth is minuscule, unemployment has risen to 5.8 percent and threatens to exceed 6 percent, consumer spending - the engine that has kept the economy afloat - has fallen off sharply in recent months, housing construction is cooling, and corporations are not investing much in plant and equipment.

"I don't think these challenges are going to go away after Iraq is rolled up," Kasriel said.

Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, said that if the war ends quickly, the economy will probably get a psychological boost that could drive stock prices higher and oil prices lower. But that, he said, could be temporary.

"We would feel better, not completely, because there will be all of these lingering problems afterward," Sohn said.

"The economy is not as strong as it was prior to the [first Persian Gulf war]. We are coming out of a recession, 9/11, corporate shenanigans and the stock market crash. We are on a much softer economic base."

Sohn said the war, higher gasoline prices and a decline in jobs have jolted consumers, who in recent years have spent heavily on cars, homes and electronics such as computers and televisions.

"Consumer spending is pretty much tapped out. Even zero percent financing is not doing the trick for cars," he said.

But Sohn looks for increased business spending to give the economy a boost later in the year.

Recession feared

Problems for the economy will get worse if the war drags on and U.S. casualties grow, economists said. If that happens, some of them think, the economy could slip back into recession.

"We are awfully close" to recession, said Charles W. McMillion, chief economist at MBG Information Services in Washington. "That big drop in retail spending in February and flat industrial production. I think we are just pretty much treading water right now with the economy."

A protracted war could unravel the stock market and send oil prices soaring to $80 a barrel, Sohn said.

Federal Reserve Chairman Alan Greenspan "would have to cut interest rates down to zero. But that wouldn't be enough to prevent the economy form slipping into a recession," he said.

Compounding those problems is the fear that the country might be the target of more terrorist attacks, which could paralyze businesses and send consumer's scrambling for the safety of their homes and away from stores and malls, experts said.

"A major terrorist strike could really freeze in place business investment and undermine consumer confidence and investing," McMillion said. "I think we are really in a vulnerable position."

Upbeat view

In contrast, Michael R. Englund, chief economist at MMS International, a financial and economic forecasting firm in New York, said the economy is doing better than expected and shouldn't fall into recession even with a protracted war.

"We are not as pessimistic about the economy as some," Englund said. "There is uncertainty relative to the war. Aside from that, there are very few negatives weighing on our economy right now."

Englund expects consumer spending and residential construction to hold up. He also sees businesses beginning to invest in plant and equipment.

Low interest rates and another tax cut should propel the economy, especially in the latter half of the year, Englund said.

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