Growth comes with an asterisk

Every economic gain seems to be offset by depressing news

More jobs but jobless rate is up

Iraq insurgency is threat, but is boon to U.S. firms

April 11, 2004|By Meredith Cohn | Meredith Cohn,SUN STAFF

Every bit of good economic news these days seems to come with an asterisk at the end.

More than 300,000 jobs were created last month, but the unemployment rate did not improve.

Housing starts and sales are near record levels and the bitter temperatures of winter have warmed, but oil prices are spiking.

Major combat operations in Iraq ended nearly a year ago, but this week, the U.S. military is facing a bloody and potentially expensive uprising and Condoleezza Rice, President Bush's national security adviser, faced hard questions before the 9/11 Commission and a national television audience.

There are some signs that the barrage of information, and particularly the recent graphic images from Iraq carried by newspapers, television and the Internet, may be dampening the confidence of consumers, investors and business decision-makers. Indeed, after some big gains the previous week, the markets ended last week on a down note. Still, economists are voicing optimism for the future - if not in the short term.

"Broadly speaking, there is a lot of momentum in the economy right now," said Amy Crews Cutts, deputy chief economist for Freddie Mac. "We can't predict the `what ifs,' so we go with what we know and what we've seen in the past. Momentum seems to be what's important, not the volatility."

Economists at the mortgage giant predicted housing starts this year will match 2003, when they hit a 25-year peak of 1.85 million units. Housing sales will likely set a record, up to 7.27 million units, or 1 percent higher than last year.

Several economists also believe the gross domestic product - the measure of goods and services produced in the United States and a top measure of economic health - will continue to rise above 4.1 percent, the annual rate it grew in the fourth quarter of 2003. They also predict the unemployment rate will come down from the 5.7 percent recorded in March.

But optimistic predictions were tempered by those "what ifs," particularly the ones arising from the cost of oil and cost of the war on terrorism, said Alan D. Levenson, chief economist at T. Rowe Price Associates Inc. in Baltimore.

"In terms of risks, the most significant one to me is going to be related to the budget. We've got pressure to boost spending on homeland security and defense," he said. "It's a burden because that money is going to have to come from borrowing, increasing the debt or tax revenue, which could have been spent on other things."

Stemming the violence could also have an impact beyond the immediate cost of paying for it. It could affect attitudes.

There was some evidence that happened Thursday, the last trading day before this holiday weekend.

On the same day that Rice testified and soldiers in Iraq battled to contain an uprising that has killed dozens of Americans and Iraqis, the Dow Jones industrial average closed at 10,442.03, down 38.12 points. The S&P 500 closed at 1,139.32, down 1.21 points. The Nasdaq closed at 2052.88, up 2.64 points.

The market is still way up from almost a year ago, when Bush declared major combat operations over in Iraq, but down from its peak in 2000.

But beyond blips in the stock market, there is not much evidence that the war's impact will halt the recovery, said Daniel E. Laufenberg, chief economist for American Express Financial Advisors.

Many companies reported strong earnings for the year's first quarter and shopping activity continues.

"In Iraq, certainly the violence has escalated and that can't be a good thing for people's attitudes," he said. "To the extent it has an impact on their behavior is less certain."

Consumer spending is based more on whether people have money in their pockets, Laufenberg said. And with jobs and wages on the increase, they have money. And if spending continues, business will continue to add jobs, albeit cautiously, he said.

CompuDyne Corp., a Hanover company that makes security products for U.S. embassies and the military, said business has picked up since government spending for security has gone from the planning stage to the budgeting stage.

Martin Roenigk, CompuDyne's chairman and chief executive officer, said the company is just starting to get more orders for its products. They range from pop-up vehicle security barriers, to bullet-blast and attack-resistant windows and doors, to perimeter sensors that warn of security breaches around buildings, airports and other facilities.

While the company expected to report disappointing earnings for the first quarter, forcing its stock price to sink close to 15 percent to $12 Thursday, it expects a boost to sales and earnings in the second half of the year and into 2005. Already, the company is seeing sales soar for its fiber-optic sensors, which it has sold to the military for use in Iraq and Afghanistan.

"The bidding activity is very strong and the embassy activity is going to be very strong," Roenigk said, also mentioning the terror bombings in Madrid last month.

"What happened in Iraq and happened in Spain will simply expand the definition of how much our type of product is required and further accelerate the budgeting and spending."

Sun staff writer Lorraine Mirabella contributed to this article.

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