Analysis: Beige Book's duct tape economy

www.upi.com By Ian Campbell UPI Chief Economics Correspondent From the Business & Economics Desk Published 3/5/2003 6:56 PM

Duct tape is selling, but not much else. The problem is "geopolitical," "war," "Iraq" and "layoffs."

It cannot be very often that the word "geopolitical" has appeared 12 times in the not very long Beige Book report, the U.S. Federal Reserve's eight times per year summary of economic conditions, the latest of which was released Wednesday afternoon.

It does this time. The report provides yet more evidence of the decline of the U.S. consumer, daunted by imminent war and uncertainty about the economy.

"Many reports indicated that geopolitical and economic uncertainties were constraining consumer and business spending," the Fed says it its summary.

Duct tape, which doesn't seem to be the sternest of protection against a terrorist attack, is being bought for its defensive qualities. And "defensive" describes the usually unstoppable U.S. consumer.

"Overall consumer spending remained weak during January and February," the Fed writes. Even with the short-term interest rate at 1.25 percent and the government slashing taxes, consumption is weak. That is a recent development, which takes the U.S. economy into hazardous new territory.

The territory comes in part with the prospective invasion of Iraq. The word "war" appears nine times in the Beige Book; "Iraq" six times. All over the country, in different sectors of the economy, the weight of impending war is being felt.

"Commercial lending remained weak, in part because of the uncertainty over Iraq," the Richmond Fed says.

Time for a nice new car? "Compared with contacts in other industries, auto dealers appeared to be more adversely affected by uncertainty over a possible war with Iraq," the Kansas Fed says.

There will be "no sign of a real pick-up in activity until the Iraq situation is cleared up," says a plastics producer in North Carolina.

Rising oil prices don't help either. They are being "pushed up by continued global uncertainties in Iraq and Venezuela," the Dallas Fed reports

Yet war is only half the problem. The St. Louis Fed found car dealers reporting that sales in December and January fell from year-earlier levels. "Almost all contacts," the Fed said, attributed this to "the threat of war" and "to an uncertain economy."

"Layoffs," a word occurring five times in the Beige Book, are the threat.

The summary says: "State fiscal woes were cited as contributing to layoffs in the Minneapolis and Kansas City regions."

The Minneapolis Fed reports more than 1,000 layoffs in the high-tech and financial services sectors -- and a bus manufacturer.

From the Boston Fed, the reports are particularly bleak. "About one-half of the manufacturing contacts expect to shrink their workforce in coming months." Most of the rest are holding steady "following layoffs in recent months."

Boston adds another negative factor for economic prospects: "In 2003, merit pay increases are or will be modest, ranging from zero percent to 4 percent at most firms."

War and economic uncertainty are then the themes of this Beige Book. When the next one appears on April 23, there can be little uncertainty about one thing: the war will already be being waged or be over.

If the war is swiftly won, will the economy then be stronger?

A cloud, it is true, would have lifted. Oil prices would come down. But war is only one of the clouds hanging over the U.S. economy. The fiscal position is bad. State and municipal governments are having to cut back on staff and spending. The consumer, so long a free spender, was and is uncertain about the economy, not just Iraq, and is right to be.

The economy's decline from those euphoric days when money grew on trees known as "stocks" continues. War is just an ugly episode on the way down.

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