Investors: hawks no longer

Investors who couldn't wait for the war to begin and ignite a stock market rally may be facing a new threat: the war's end.

That's because that's when investors' focus will be expected to return to the fundamentals of the economy.

The government reported on Thursday that the economy grew at a mediocre 1.4 percent annual rate in the final quarter of 2002. Economists are increasingly pointing out that growth is so small that the economy might be slipping backward, toward recession.

Businesses are delaying spending on new projects, expectations for corporate profits are being slashed daily, high oil prices might continue heading up, and there is a bleak outlook for anyone needing a job.

''Look at the way the economy came into the new year: There was very weak momentum; auto sales fell; the weather was bad; there were war jitters,'' said Sung Won Sohn, chief economist at Wells Fargo. ``As a result of the expectations of war and now the ongoing war, both consumers and businesses have decided to put everything on hold.''

The local economy is a little better but not much.

One of South Florida's most important industries, tourism, fears what war will do to vacationers. Though hotel reservations have stayed the course so far, bookings for cruises leaving from South Florida ports have been soft.

Miami-Dade, which had been leading the state in creating jobs, has slipped. In January, only 11,700 jobs were created in the county, for a growth rate of a mere 1.2 percent. Broward County, which had a net loss of jobs in 2002, saw 9,700 more jobs in January, for a 1.4 percent growth rate.

Here are some of the signs economists say could signal a downturn:

• Businesses are putting on hold decisions to build or buy buildings and equipment.

In a poll released on Wednesday by Duke University's Fuqua School of Business and Financial Executives International, a professional group, fully 67 percent of chief financial officers surveyed said they were putting off capital projects or spending cautiously because of war-related uncertainty.

Whenever the Iraq conflict is resolved, however, the end of the war itself doesn't seem likely to spur capital spending.

In the CFOs' view, anything other than a quick victory -- within six months -- will mean that their own companies either won't see any growth in revenues this year or, in the worst case, a precipitous decline. If there's no growth in the top line, it's a good bet there won't be growth in spending.

What's more, the economy is still recovering from companies overspending on telecommunications equipment during the stock market bubble. And now it doesn't look as if the nation has an urgent need to build more factories.

Factories are, in the most recent statistics on capacity utilization, running at 75.6 percent of capacity this year, or 5.7 percentage points below their five-year average.

That hurts the economy, because, said Duke professor Campbell R. Harvey, ``without more robust capital spending, it is unlikely we will see growth in nonfarm payrolls.''

Consumer spending has been holding up the economy, but Sohn says a capital spending increase is critical to restarting economic growth.

''The economic baton needs to pass from consumers to businesses,'' he said, ``and that is not happening.''

• Expectations are falling.

The consensus prediction for real (after-inflation) gross domestic product, according to the March survey of top analysts called Blue Chip Economic Indicators, has fallen 7 percent in two months. GDP measures the total value of goods and services produced within the United States and is considered the best barometer of the economy's health.

In December, this panel was looking for 2.8 percent growth for 2003. By February, it said 2.6 percent. (The CFOs, by the way, told Duke to look for 1.7 percent.)


What's more,, a West Chester, Pa. economic research firm, estimates that just the anticipation of war has nicked something between 0.5 to 1 percent off the GDP, on an annualized basis, since the middle of last year.

If the economy is in the slow-growth mode, the prospects for growth in corporate profits, which are key to stock prices, are dimmed.

In December, the Blue Chip survey consensus was for 8.8 percent growth this year in corporate profits. Now, the consensus has fallen to 7.3 percent.

• The hiring outlook, too, is poor for a nation that already has 5.8 percent unemployment.


A quick resolution to the war in Iraq means not one new job, in a survey last week of 50 chief financial officers at companies with $100 million or more in revenues. The poll was done by the research outfit Sanford C. Bernstein.

The Duke poll asked the same question and found that 68 percent of firms plan to make no changes or will cut jobs within the next 12 months.

• Oil prices, which economists feel can influence their outlook more than any direct costs of mounting a war, remain high. Crude oil for May delivery closed Thursday at $29.65 a barrel, 16 percent higher than last year at this time.

They could go either way, depending upon the war's progress. figures that the anticipation of war added $5 a barrel to oil prices and that that, too, cut into GDP growth by 0.25 percent. Even in a short, three-month conflict, says, oil prices could return to their prewar peak of nearly $40 a barrel. If the conflict were prolonged, the peak could be $50.

Consumers are feeling the pinch. In February, as gasoline prices soared, demand actually declined.

The American Petroleum Institute reported that this might have had something to do with the fact that retail prices were 45 percent higher than the year before.

• The costs of the military campaign are becoming known.

President Bush's $74.7 billion war package, proposed Monday, is only designed for six months.


The prospects for growth are poor, even without considering the cost of war.

And that will be no small burden. estimates that just a three-month conflict will carry a $50 billion price tag.

A longer war, one in which the hostilities extend through December, could reach $150 billion, the firm says.

And that's excluding the expense of rebuilding Iraq.

Merrill Lynch, on the other hand, sees the cost of fighting the war, terrorism and homeland security could as adding $170 billion to defense spending.

On Tuesday, the Senate chopped off half of the President's tax cut, in part because someone has to pay for the war.


The issue is far from over, but opposition has grown to putting that money into the hands of consumers.

With the end of uncertainty over the prospects of war, even Wall Street is beginning to see clearly a picture that's not good.

''I think the economy, to some degree, is being held back by the war but also by the stock market,'' said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp.

The mistake, she says, would be to assume that what's going on right now will continue over the long term.

Investors, however, aren't in an upbeat mood.

Between March 18 and March 21, optimism over the war's outcome led to a strong rally that pushed the Dow Jones Industrial Average up 4 percent, the Standard & Poor's 500 3.39 percent and the Nasdaq Composite Index 1.52 percent.

But, since then, everything's come tumbling down.

The Dow has lost almost all its gains. Since March 21, it is off 3.76 percent, the S&P 3 percent and the Nasdaq 2.64 percent.