The economic outlook: More trouble after the war
IHT Paul Krugman NYT Monday, April 7, 2003 NEW YORK Over the last two weeks, nobody has been paying much attention to economic news; even the ups and downs of the Dow have reflected reports from the battlefield, not the boardroom. But the economic news is quite worrying. Indeed, the latest readings suggest that the U.S. recovery, such as it is, may be stalling.
It also suggests that the rate at which things are getting worse is accelerating. In February, U.S. payroll employment fell by 308,000 - the worst reading since November 2001. On Thursday there were two more worrying indicators: new claims for unemployment insurance jumped, and a survey of service sector companies suggests that the economy as a whole is contracting.
Now what? Ever since hopes of a rapid recovery faded last summer, the economy has seemed balanced on a knife-edge. Pessimists warn that the United States is near its "stall speed": growth so slow that consumers, nervous about a weak job market, cut back on spending and send the economy into a tailspin. Yet optimists keep expecting businesses, anxious to update their technology, to resume large-scale investment and create a robust recovery. Both outcomes are still possible, but it seems increasingly likely that consumers will lose their nerve before businesses regain theirs.
Optimists now place their faith on salutary effects of victory in Iraq. The theory is that businesses have been postponing investments until uncertainty over the war is resolved, and that once that happens there will be a great surge of pent-up demand. I'm skeptical: I think the main barriers to an investment revival are excess capacity, corporate debt and fear of accounting scandals. I also wonder whether victory in Iraq will mark the end of uncertainty, or the beginning of even more uncertainty. Are Americans on the road to Damascus (or Tehran, or Yongbyon)? Meanwhile, there's a new concern: Macroeconomic recovery may fall victim to microbe economics. Serious people know that germs pose a far greater threat to mankind than terrorism, and that microbes have been the downfall of many a civilization. SARS - severe acute respiratory syndrome, the new virus from China's Guangdong Province - doesn't look like a civilization-killer. But experts fear that it may be too late to stop the virus from spreading throughout the world. And the bug is already having major economic consequences: Fear of the disease has paralyzed much business in Hong Kong and has led to a drop in air travel worldwide.
Even if SARS doesn't become widespread in the United States, it can do a lot of damage to the American economy because the world has grown so interdependent. Consider this: The most likely engine of a vigorous U.S. recovery would be a renewed surge in technology spending, and Guangdong is now the workshop of the information technology world, the place where a lot of the equipment that we would expect businesses to buy if there was an investment boom. The virus is already hampering production. The result may be to stall an investment recovery before it starts.
The war has monopolized everyone's attention, including mine. But other things are happening, and you shouldn't be shocked if the economic news turns awful.
E-mail: krugman@nytimes.com