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BUSINESS TODAY  March 22, 2003

Latest business news / Stock quotes / Georgia stocks / Business email

Quick finish to war likely tonic for faltering economy
Michael E. Kanell - Staff
Saturday, March 22, 2003

The economy has slipped closer to recession, according to the weekly index issued Friday by the Economic Cycle Research Institute.

That measure has dropped for five weeks running, a sign that the already-uncertain recovery rolled into reverse.

Worry about war has depressed everything from home sales to spending, but a quick U.S. victory can turn the economy around, said Lynn Reaser, Bank of America chief economist.

"Falling energy costs, rising stock prices and growing optimism could all help to unlock the U.S. economy's underlying potential," Reaser said.

The start of the war has likely chilled spending on retail and travel. But if the attack on Iraq leads rapidly to resolution with few American casualties, company revenues will increase 8 percent during the next 12 months, according to most chief financial officers surveyed days ago by Financial Executives International and Duke University's Fuqua School of Business.

While the economy has grown since 2001, the group charged with designating recessions has yet to declare that downturn done.

"Employment, perhaps the most important measure of turning points in the economic cycle, continues to behave as if the economy remains in a recession," said Dorsey Farr, senior economist at Balentine & Co.

The chill on business investment is seen as the reason the economy is still shedding jobs. And about seven of 10 CFOs said they are either spending cautiously or not at all.

Impending war had spurred run-ups in oil prices to nearly double the levels of a year ago. Like an unexpected tax, that added cost trimmed both corporate profits and consumer spending.

On Friday, government figures showed oil helped nudge inflation over 3 percent last month, nearly double the pace from five months ago. That has been "a significant shock to consumers who are enjoying only negligible wage and salary gains," said economist Andy Kish of Economy.com.

But once the U.S. attack loomed, oil prices fell dramatically.

Had early battlefield news shown devastation of Iraqi --- or neighboring --- oil fields, those prices might have skyrocketed. Instead, the economic burden is lightening.

The most urgent fear, of course, is that the war will be long and difficult. Prolonged war would mean flat or decreasing sales, the CFO survey showed.

"It is clear that a longer war would push us back into recesson," said Duke economics professor Campbell R. Harvey.

But expectations of a quick victory could pump up confidence. Those expectations already have sent the stock market up 13 percent in eight days.

Without a confidence bounce, that spending could be weak, according to a survey of 2,645 consumers by the NPD Group: 41 percent said they will spend less than usual this spring, while just 14 percent plan spending "more than usual."

Consumers, who account for two-thirds of the economy, have --- at least until recently --- carried more than their share.

"We have to look toward the corporate sector or to the government," said Rajeev Dhawan, director of economic forecasting at Georgia State University. "The consumers have done their part."

Certainly the pre-war weakness is clear: The economy will finish the first quarter of 2003 with growth just barely positive, and will chug through the spring with no growth at all, said economist Richard Berner of Morgan Stanley.

"The damage from the energy shock is still spreading through the economy," he said. "Energy prices on balance are still higher than in November, and geopolitical uncertainties linger outside Iraq or the Middle East."

As the Iraq crisis dampened confidence, so might a heating of tensions with North Korea.

Economic hopes ride partly on precedent: The first Gulf War in 1991 sparked a stock market rally. But pessimists retort that the surge was deceptive, that the economy limped along for more than a year before job growth returned.

This time, much of the most potent fuel for igniting the economy has already been burned.

The Federal Reserve has used 40-year lows in interest rates to virtually pour money into the economy. The result has been a boom in housing and often-strong sales of vehicles. So the Fed campaign may have staved off collapse, but it hasn't ignited a robust recovery either.

Now, the benchmark overnight rate is down to 1.25 percent, and the Fed is running out of room to spur the economy.

And with economies in most of Europe and Asia staggering, demand for U.S. products and services is weak.

LEADING WHERE?
The last few weeks have seen a continued slide in a measure meant to show where the economy is headed. One index of leading indicators shows a renewed recession more likely.
Bar graph tracks the index from March 3, 2000 to March 14, 2003.
Source: Economic Cycle Research / ELIZABETH LANDT / Staff


 

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2003 The Atlanta Journal-Constitution