Economy in the line of fire - Longer-than-expected conflict could push U.S. into recession
www.chicagotribune.com Special report Business By William Neikirk Tribune senior correspondent Published March 19, 2003
WASHINGTON -- 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 say.
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.
From 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.
But in 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 all."
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.
Kurt Barnard, 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 reduced.
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 cars.
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.
"The idea 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 quick victory.
"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 general strike."
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 rising.
"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 worse."
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 higher.
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."