Economy in the line of
Longer-than-expected conflict could
push U.S. into recession
By William Neikirk
Published March 19,
Every conflict has winners and losers, but a war
with Iraq could hurt many Americans economically if it lasts longer
than the few weeks projected by the Bush administration, experts
A longer-than-expected war could spell the end for one
or two airlines, keep gasoline prices high, reduce consumer spending
and possibly push the U.S. and world economies into recession,
according to economic analysts.
President Bush's standpoint, dispatching Saddam Hussein swiftly has
not only major military and political significance, but also
far-reaching economic implications. A quick, relatively painless war
could hasten a return to confidence and speed decisions by
businesses to invest and hire again.
Yet even if the war is
short, the U.S. economy remains too weak to bounce back strongly,
said David Wyss, chief economist at Standard & Poor's Corp.
Businesses remain burdened by overinvestment from the 1990s, and
demand for U.S. goods is weak worldwide.
"We won't go back to
a strong recovery pattern," Wyss said.
The number of war
winners is likely to be sparse. The postwar reconstruction period in
Iraq could prove highly profitable for U.S.-based international
construction firms, such as Bechtel Corp. Defense contractors will
rake in more earnings from bomb and missile orders.
the job market, where it counts for most Americans, the war could
cause higher unemployment if U.S. forces are not successful quickly.
To Campbell Harvey, professor of international finance at Duke
University, the longer the war persists, the more severe the
economy's troubles will become.
John Silvia, chief economist
at Wachovia Securities, said a swift war would not rejuvenate the
job market anytime soon.
"Jobless claims are not going down,
and help-wanted advertisements continue to be low," he said. "It
tells you the employment market is not in good shape at
A war of any length will be hard on the long-term
unemployed, Silvia said. Since 2000, the number of Americans who
have been out of work 27 weeks or more has tripled. This group now
represents one-quarter of the unemployed.
president of the Barnard Retail Consulting Group in Upper Montclair,
N.J., said he is concerned that retailing will be hurt by fears of
terrorist attacks in the U.S. If only 2 percent or 3 percent of
shoppers stay away from malls, he said, sales could be sharply
In general, Barnard said, war makes people
conservative about spending their money.
"Their mood will not
be one of happiness. The mood will be sober," he said, adding that
consumers are likely to forgo buying big-ticket items such as
Another loser will be the U.S. taxpayer. The cost of
fighting the war--estimated as low as $61 billion and as high as
$200 billion--will be borne by American taxpayers, unlike the
Persian Gulf war in 1991, when many other nations chipped in. In
addition, taxpayers will be on the hook for much of the cost of
reconstruction in Iraq.
Bush administration officials say
Iraqi oil will help defray reconstruction costs. But Michael Drury,
chief economist at McVean Trading and Investments, a Memphis-based
futures trading company, disputed that assessment.
that oil revenues will pay for reconstruction is a joke," he said.
"Now it is taking all their oil revenues just to feed the country,
to keep the people from starving."
A key economic issue will
be how high the price of oil will go during hostilities and how long
it will take for that price to fall. Laurence Meyer, economist at
the Center for Strategic and International Studies and a former
Federal Reserve member, said that if there is no damage to the oil
fields, oil prices could settle down to $25 to $30 a barrel by the
end of the year.
In Tuesday's trading, oil prices on the New
York Mercantile Exchange dropped 9 percent, to $31.67 a barrel, the
lowest price in two months, on expectations that the war will be
over quickly and that global stockpiles are sufficient to satisfy
demand. But if war fortunes take a turn for the worse, oil prices
could skyrocket, said Harvey of Duke University.
The fear of
oil prices surging over $40 a barrel and staying there for months
during a difficult conflict may have dissipated for now. But the
very possibility of this underscores the economic importance of a
"A lot of the current thinking is that oil
prices may stay up longer than people think," said Carl Tannebaum,
chief economist at Chicago's LaSalle Bank. "We have depleted a lot
of supply, and [oil supplier] Venezuela is still in the midst of a
Opinion is divided on whether investors will
be the winners in war. Bush's ultimatum for Hussein to leave Iraq by
Wednesday night or face U.S. military action caused a rally on Wall
Street. But now the question is whether the market will continue
"Initially, the markets respond favorably because
there is some resolution of what is going to happen," said Ed
Peters, chief investment officer at PanAgora Asset Management Inc.
in Boston. "If things go swiftly [in the war], the market will
continue to do well. If the victory is messy, that could make it
In the long run, however, stock prices require a
stronger economy with greater corporate profitability, Wyss said.
And even if the war is short, he said, it would take time before the
recovery gathers enough steam to drive stock prices
The travel industry, which suffered
disproportionately during the 1991 Persian Gulf war, is again likely
to be a major loser in this conflict. The airline industry, in a
plea for more government assistance, already has warned that its
business could be hurt drastically by war.
"Even without a
war, you might lose an airline," Wyss said. "And by that, I mean
liquidation, not just bankruptcy."
Copyright © 2003, Chicago Tribune