It Could Be Long War For Economy, Too --Consumer confidence down

<a href=www.newsday.com>By James Toedtman CHIEF ECONOMIC CORRESPONDENT

March 30, 2003 Washington -- Hopes for a quick postwar recovery by the U.S. economy have hit a land mine on the road to Nasiriyah. As the timetable for a successful war has been sharply extended by surprise resistance and unexpected attacks in southern Iraq, war nerves have shaken consumer confidence and the already unsteady stock market. A war premium on energy prices persists, and business is nervous and reluctant to push sales in an increasingly anti-Yankee global marketplace, economists say. "I think we will win the war. But the question is: How do we feel about winning the war and when do we win the war?" said Martin Regalia, chief economist for the U.S. Chamber of Commerce. Like military commanders, consumers, economists and business leaders hunt for clues to the length and difficulty of the conflict. "We’re going to know where we’re headed in a very short time," said Kevin Hassett, economist at the American Enterprise Institute. But, he added, the war "could drive us into a deep recession." As television images of powerful explosions over Baghdad gave way to pictures of hollowed tanks and wounded soldiers, there were new signs that U.S. economic activity was creeping to a halt. The prewar rally on Wall Street two weeks ago collapsed Monday and the markets slumped for the rest of the week, with the Dow Jones industrials dropping 376 points, or 4.4 percent, in five days. The week’s economic data also indicated flat consumer spending for the second straight month, lower consumer confidence for the third straight month and the dollar at its lowest value in four years. "A weak dollar may translate into greater exports as it makes our goods more competitive," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. "That’s all good, given economic growth in the U.S. seems to be on life support." Conversely, of course, a weaker dollar makes imported goods more expensive for American consumers. History dictates a preoccupation with energy prices, since the six recessions in the past 33 years have followed energy price spikes. Although crude oil prices reached $40 per barrel three weeks ago, they declined below $30 after the fighting began until rising 10 percent last week. Still, said Sung won Sohn, economist for Wells Fargo Bank in Minneapolis, prices should be in the $22-$24 range based on current supply and demand, reflecting a war premium of more than $5. Price pressure has eased in part because disruptions in Venezuela have ended and the demands of a cold winter have passed. But the deeper the Iraq conflict lasts into the summer driving season, the sooner energy prices will increase. War costs are another unknown. The administration’s initial estimate of $75 billion is regarded as modest in a $2.2-trillion budget. But by the end of the week, the Pentagon was planning to deploy an additional 100,000 troops. Further, the estimate includes $3 billion for reconstruction costs. The Congressional Budget Office estimates rebuilding costs at $12 billion to $40 billion a year, while a recent study directed by former Defense Secretary James Schlesinger projected a $20-billion annual cost for a stabilizing and rebuilding effort that would last many years. Figures like those contributed to growing angst over what Senate budget analyst William Hoagland referred to as the "shock and awe deficits" in the federal budget, which have soared from $118 billion to more than $400 billion this year alone.