Posted on 04/20/2003 2:09:24 AM PDT by sarcasm
War fears made Americans less willing to spend, but the end of the war won't necessarily revive an ailing economy, analysts and economists say.
"The war is getting too much credit and too much blame for how people are looking at the economy," said Frank Newport, editor in chief of the Gallup Organization. "Consumers had a pretty negative mood in general and then the war came along."
Wells Fargo economist Sung Won Sohn estimates war worries will shave 1 percent off U.S. economic growth in the first half of the year, but increased military spending will account for half of the 2 percent growth he sees remaining. see graphic
If true, the war will prove a wash in economic terms.
Even investors, who traded stocks based on headlines during the early days of the war, didn't spark a rally the week of Saddam Hussein's collapse because they had already started to worry more about corporate earnings.
"This is not a stock market or economy that is lending itself to easy generalizations," said Jack Caffrey, an equity strategist at JP Morgan Private Bank in New York.
Gallup polls show U.S. consumers gained confidence with the start of the war in Iraq, but that boost is fading as they turn their attention back home.
For consumers, tough job markets in what is supposed to be an economic recovery are weighing on spending decisions.
"You have bought the house, the car and things still aren't getting better," said David Piazza, a research officer at Barclays Global Investors in San Francisco. "The natural inclination is to save."
About 70 percent of people surveyed by Gallup think it is a bad time to find a quality job, Newport said, a complete flip from a few years ago.
They also are more pessimistic about the health of the companies they work at. More consumers, who account for more than two-thirds of economic activity, say they plan to save more and borrow less, he said.
Economists predicting stronger economic growth see it coming from increased business spending, which has been depressed since 2000, and not a boost in consumer purchases, which have held up.
Businesses have drawn down their inventories and at some point will need to increase production to meet future orders, Piazza said.
"The volatility in consumer spending is much less than the volatility in business spending," Piazza said.
Some economists even view the economy and stock markets as coiled springs ready to unleash once the tensions holding them back are removed.
"The end of the war is definitely a significant event that should prop up attitudes in both the consumer and business arena," said Bob Bush, an economist with ERIC Forecasting Publications LLC.
The U.S. gradually pulled itself out of recession after the end of the 1991 Gulf War and stock markets went on to enjoy their best decade ever.
But hopes that consumers will celebrate the quick fall of Baghdad by rushing out to buy refrigerators and washing machines may be misguided, other analysts said.
It's possible that a robust recovery isn't around the corner because U.S. businesses built up too much capacity during the late 1990s and are having a hard time paring it down. That leaves them unable to pass on price increases and less willing to make major investments.
U.S. manufacturers are using only 72.9 percent of their capacity, a 20-year low, and technology manufacturers are using less than two-thirds of their capacity versus 90 percent in 2000, according to the Federal Reserve.
Because global trade is much broader today than in 1991, excess capacity in China, Mexico and other countries worsens the problem in the U.S., JP Morgan's Caffrey said.
Lower interest rates and tax breaks aren't motivating businesses to invest, unless those investments will make them more productive. Higher productivity in turn makes them able to produce more goods at lower prices and with fewer workers, resulting in layoffs.
U.S. manufacturers have reduced payrolls for 32 straight months, eliminating one out of 10 manufacturing jobs the past two years.
Tech manufacturing has suffered even more, taking a 20 percent hit in employment. Once the leading source of employment in manufacturing, technology is now third behind food products and transportation, according to Investor's Business Daily.
"U.S. companies have relentlessly cut payrolls in recent years to meet the realities of weaker product demand and the need for stronger profitability," notes Vectra Bank economist Jeff Thredgold.
Sohn predicts economic growth of 2 percent in the first half of this year, which won't be enough to prevent additional layoffs.
Even the 4 percent rate he sees for the second half of the year won't result in a wave of hiring.
There is also a dispute over whether the war, which went more quickly than thought, is really over.
The current conflict lacks the clean ending of the 1991 Gulf War, which ended when Iraq was pushed out of Kuwait.
"Americans aren't seeing it as totally over at this point," Newport said.
Thousands of U.S. troops could remain in the region to ensure Iraq's transition to democracy.
And rumblings that Syria or Iran are in the cross hairs of Bush administration officials won't allow the world to relax soon.
As weak as the economy is in the United States, Sohn said it is even more sluggish in the rest of the world.
The economies of France, Germany and Italy all have stalled, Japan remains moribund, and fears of SARS are slowing down the rest of Asia.
HUH?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.