Local economist thinks length of war will determine its effect on KC

Posted on Wed, Mar. 26, 2003 By ERIC PALMER The Kansas City Star

A Kansas City economist set out Tuesday to answer the pressing question: What will the war with Iraq mean for the region's economy?

His conclusion: It depends.

If the war with Iraq ends quickly, the Kansas City area can expect economic growth of just under 2 percent in the first half of this year, but double that by year's end.

If the war is prolonged and oil prices remain high, the rate of growth in gross regional product will be reduced by 2 percentage points over the next 12 months, economist Frank Lenk told about 300 people attending the midyear economic forecast of the Greater Kansas City Chamber of Commerce.

Instead of adding 26,000 jobs, as seen under a short-war scenario, a long war would mean the economy would add only 8,000 jobs between now and the first quarter of 2004. If the war persists, however, 6,000 of those new job gains would disappear by the end of 2004.

"Most people believe in the short-war scenario," said Lenk, director of research services for the Mid-America Regional Council. "But even a short war will incur real economic costs. The resilience of the economy, however, means a short war will delay the economic recovery, not derail it."

The economic forecast, held at the Hyatt Regency Crown Center hotel, updated economic projections for the year that had been made in September. The war with Iraq was not factored into the earlier forecast.

Assuming a short war, Lenk projected that all sectors of the local economy, except government, will add jobs. Services should add 13,000 jobs and retailers would add 5,000 jobs between the first quarters of 2003 and 2004. Even manufacturing is expected to gain close to 3,000 jobs, bringing it back to levels last seen in 2001, he said.

In addition to Lenk's projections, a panel discussed what the war will mean for the Kansas City economy.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said he believed the war wouldn't be dragged out. He said he expects national economic growth of 2 percent to 2.5 percent in the current quarter and about 4 percent by 2004. The Kansas City area economy should closely follow the national economy, he said.

"Fiscal policy has been stimulative. We have had one tax cut, and another is on the table," Hoenig said. "That puts money into the pockets of consumers. Monetary policy has been accommodating, with short-term interest rates at 40-year lows."

The local economy's fundamentals are generally favorable for economic recovery, Hoenig said, with business inventories at historic lows, suggesting there is some pent-up demand for businesses to buy.

Consumers are pulling back somewhat on their spending and have a high debt level, Hoenig noted. But interest rates are so low that the cost of handling that debt is manageable.

Hoenig declined to predict whether the Federal Reserve will further cut interest rates in coming months.

As the war proceeds, it will be easier to sort out its effects on the economy from other factors, Hoenig said.

One of those other factors is the health of other economies with which the United States is intertwined, Hoenig said.

Japan's economy has been weak for a decade, Europe is having slow growth, and there are trouble spots in South America, like Venezuela, from which the U.S. gets a significant amount of its oil.

On balance, though, Hoenig said he sees a lot of opportunity for growth locally.

The current world risks create a greater need for vision and flexibility in U.S. business executives, said Bill Eckhardt, professor of law at the University of Missouri-Kansas City. Eckhardt is a retired colonel who taught military law and litigated in military courts for 30 years.

Executives, like their counterparts in many parts of the world, must learn to factor threat and risk into their economic planning, Eckhardt said. And as a country, we must not let such risks keep us from being a bold country.

"I don't know how we collectively face our fears, but we must not just hunker down," Eckhardt said.

To reach Eric Palmer, regional business editor, call (816) 234-4335 or send e-mail to epalmer@kcstar.com.