reuters.com Wed February 26, 2003 01:08 PM ET By Nichola Groom

NEW YORK, Feb 26 (Reuters) - U.S. manufacturers, already tripped up by a prolonged economic slump that has battered both share prices and business spending, face another hurdle on the road to restoring profit growth -- the rising cost of energy.

With crude oil prices hovering at a more than two-year high on fears about the possibility of a war in Iraq, several companies have already warned of the negative impact higher energy costs will have on their bottom lines this year and many more are expected to follow suit.

"I'm certain we'll see more (warnings), particularly in the basic materials group," said Chuck Hill, director of research at Thomson First Call, which tracks company earnings.

Makers of raw materials like steel, wood and chemicals are usually hit hardest by rising energy costs, Hill said, because they use large amounts of electricity and steam to power massive manufacturing facilities.

Analysts who cover those industries are worried earnings estimates for the first quarter will have to come down as the impact of higher energy costs takes shape.

"We are concerned that, in the near-term, (cardboard box makers) will be facing another round of downward estimate revisions," Deutsche Bank Securities forest products analyst Mark Wilde said in a report last week. "Moreover, it looks to us like the head winds from weak volumes and higher energy costs will be greater than expected (in the first quarter).

Indeed, some companies have already begun trimming forecasts in part because of rising energy costs.

Eastman Chemical Co. EMN.N , a big maker of plastic beverage bottles, as well as chemicals used to make adhesives, coatings and inks, said last month it's first-quarter profit would fall below Wall Street forecasts in part due to higher raw material costs.

On the same day, Lyondell Chemical Co. LYO.N also warned that first-quarter earnings would be impacted by the cost of reduced oil supplies from Venezuela, which is in the midst of an an 11-week oil strike.

HOLDING BACK BUSINESS SPENDING

Oil prices are trading at $37 a barrel -- just off a 29- month high -- on concerns a U.S.-led attack on Iraq, the world's eighth biggest exporter, may hit supplies from the Middle East, which accounts for about 40 percent of globally traded crude.

The strike in Venezuela and sustained cold weather in the United States has already run down U.S. stocks of crude oil to their lowest since 1975, strengthening concerns over a supply disruption.

On a broader scale, experts worry companies may be forced to scale back spending plans to make up for the rising costs, putting the brakes on the nation's already fragile economic recovery.

Business spending has not yet recovered from a collapse that led the U.S. economy into recession in 2001 and U.S. policymakers have said the prospect of war was playing a big role in holding it back.

"Make no mistake about it, persistently high oil prices will have a major impact on the global economy," said Hugh Johnson, chief investment officer at First Albany Corp. "The impact of high oil prices is very significant on both businesses' and consumers' ability and appetite to spend."

Included among the companies that have said recently they expect higher energy costs to hurt results this year are paper and building products maker Temple-Inland Inc. TIN.N , home improvement product maker Masco Corp. MAS.N and packaging company Smurfit-Stone Container Corp. SSCC.O

biz.yahoo.com Reuters Wednesday February 26, 11:30 am ET

WASHINGTON, Feb 26 (Reuters) - Federal Reserve Chairman Alan Greenspan said on Wednesday a recently reported sharp drop in a consumer confidence index for February was significant but not particularly a surprise.

"So it is a very significant decline but...it is not a particular surprise. The order of magnitude is certainly a surprise but not the correction in that regard," Greenspan told the Senate Banking Committee.

On Tuesday, the Conference Board said its index of consumer confidence for February slumped 15 points to 64, taking the index to its lowest level since October 1993.

Greenspan said gasoline prices, which have soared partly due to geopolitical tensions such as the situation in Iraq and Venezuela, were in part to blame for poor consumer confidence.

"Consumer confidence indexes tend to be affected by events that consumers are acutely aware of such as the dramatic rise in gasoline prices," he said.

www.usatoday.com Posted 2/25/2003 10:52 PM     Updated 2/26/2003 8:44 AM By Sue Kirchhoff and Barbara Hagenbaugh, USA TODAY

WASHINGTON — Consumers are fed up. The question is whether they're tapped out.

Consumers' confidence in the economy plunged to its lowest in nearly a decade in February, with shoppers worn down by fears of war with Iraq, a stagnant job market, rising gas prices, falling stock prices, terrorism alerts and likely cabin fever at the end of a rough winter.

The sharp 15-point drop Tuesday in the New York-based Conference Board's consumer confidence index was the largest since the 2001 terrorist attacks and mimicked a similar steep decline before the 1991 Gulf War. It raised concerns Americans might be preparing to stay away from the mall and instead stay home and watch the news.

LOOKING AT THE GLASS Reasons to see it half empty: 1-Stock prices continue to fall. The S&P 500 index is down 45% from its high in March 2000. 2-Energy prices are soaring. Gasoline prices are up nearly 50% from a year ago. Home heating costs are also gaining. 3-Uncertainty about when or if the United States will go to war and what the outcome will be is growing. 4- A soft labor market. The median length of unemployment is at its highest in eight years. 5- Health care costs are rising at the fastest rate in a decade.

Reasons to see it half full 1-Home values continue to rise. Prices were up 7% in January from the previous year. 2-Interest rates are at 41-year-lows, making borrowing costs cheaper. 3-Inflation, outside of energy and food, is the lowest in decades. 4-Debt as a percentage of total family assets is the lowest since at least 1989, when records began. 5-Productivity is expected to continue to rise, leading to an improvement in living standards.

Any big pullback could risk a second recession, because consumer spending, which makes up 70% of the economy, has been the main pillar holding up the fragile recovery.

"Consumers are looking at the big picture, and they're getting scared," says Oscar Gonzalez of John Hancock Financial Services. "The simple fact is they don't have much left to draw upon. Higher gas prices are cutting into disposable income, and most consumers have already taken advantage of low interest rates."

Such concerns were partly allayed by a second report Tuesday that showed home sales rose to a historic level in January. Even the Conference Board report contained signs the strong housing market could last a bit longer. It found the number of people planning to buy a house in the next six months had risen, despite growing financial unease.

Economists caution that consumer spending is more closely tied to real income, which has risen in recent months, than to confidence numbers that can fluctuate widely. And they point to positive signs for economic growth this year: tame inflation, rising productivity and low interest rates.

Clearly, not everyone is running for the hills. William Eure, 72, a retired physician in Hattiesburg, Miss., says he's been down this road before and is confident the economy will rebound.

"We take two or three cruises a year and we're about to buy a new minivan," he says. "We're not doing anything differently than we've ever done."

Jobs hard to get

Still, many called the report cause for fresh concern, especially because more than 30% of the people responding said jobs were hard to get — a nine-year high — and only 15% expected their incomes to rise in the next six months, an all-time low. Those negative expectations are the most likely to translate into a drop in consumer spending.

Gina Martin, economist at Wachovia, says her firm expects consumer spending to fall this spring.

Paul Tennis, 43, of Pepperell, Mass., says he's worried about his job after seeing his co-workers laid off. "Certainly with the impending war, it doesn't seem like business is picking up," he says.

Tennis' car is 15 years old, but he says he won't replace it until he feels more secure about his job. He plans to save this year's tax refund.

The report also came amid signs consumers were pulling back from both the stock market and local stores and were being hit hard by a spike in gas prices that has many paying more than $2 a gallon.

Robert Mang is CEO of Galyan's, an Indiana-based sporting-goods chain with 34 stores in 17 states. He has noticed a drop in sales of big-ticket items. The $149 bicycles are selling well, but not the high-end bicycles that climb to $4,000.

"Traffic is up, but spending is down," Mang says.

The Conference Board figures, based on a survey of 5,000 people, showed the third monthly decline in a row. They were roughly in line with a University of Michigan consumer survey showing confidence at a nine-year low.

More than 30% of respondents called current conditions bad, up from 27% in January. Nearly 20% expect things to get worse in the next six months, up from 14%. While the number planning to buy houses increased, the number ready to buy a car fell to the lowest since October 1996. The decline in confidence was most pronounced among the middle-aged and better-off.

The news rattled Wall Street initially, but stocks recovered. The Dow Jones industrial average finished up 51 points to 7910, after plunging in early trading. The index is down 5.2% this year.

Professional investors acknowledge that corporate earnings and revenue growth would likely take a hit if Americans stopped spending. But many traders and strategists also view consumers' increasingly downbeat outlook as a signal that uncertainty and fear have reached extreme levels — a sign things are likely to get better.

"When confidence drops this low, this fast, it suggests that the next major move will be an improvement in conditions," says Ed Yardeni, chief investment strategist at Prudential Financial.

In the previous seven instances in which the Conference Board's indicator came in 10 points below the previous month's reading, the Dow was up an average 2.1% five days after the report's release, according to MarketHistory.com.

Keys to consumer spending

Economists have been predicting a sharp decline in consumer spending for months. So far, Americans have defied expectations and kept their pocketbooks open.

Looking ahead, analysts say several factors will determine Americans' shopping patterns:

• War. There is concern about the tangible effects of a war — rising energy prices and stock fluctuations — and more intangible fears that could further undermine confidence. Along with the Conference Board findings, a poll by the Pew Research Center for the People and the Press showed public confidence in the White House's handling of the war and the economy is declining, with few paying attention to Bush's tax-cut plan. Three in 10 Americans said they did not have enough money to pay bills and make ends meet.
• Energy. Concerns that a war with Iraq will disrupt oil supplies, a strike in key oil-exporter Venezuela and already low inventories have put pressure on energy markets. Gasoline prices are up nearly 50% from a year ago and are above $2 a gallon in many markets across the USA. Gasoline prices are something people see every day as they drive to and from work and are considered to have a big impact on consumers' psyches.

"The most visible price in America is the price of gasoline," says Daniel Yergin, chairman of Cambridge Energy Research Associates and author of The Prize: The Epic Quest for Oil, Money & Power, a Pulitzer Prize-winning book on the oil industry. "That's a big weight on the economy and on those confidence factors."

The cost of heating homes has also risen. The price of natural gas, which 55% of homeowners use to heat their houses, has more than quadrupled in the past year.

• Employment and income. While the 5.7% unemployment rate is low by historical standards, the median length of unemployment is now at an eight-year high of 9.8 weeks, and many discouraged workers have dropped out of the job market altogether. A survey released earlier this week by Manpower said employers expected hiring to slow this spring, the first decline in more than a year. There have been some signs that income growth is slowing, but it remains healthy.
• Stock market. Investor optimism in February slumped to an all-time low amid concerns about pocketbook issues, according to UBS' index of investor optimism.

"The investor is telling us that until they see this economic recovery is for real, they are not jumping into this market," says Tracy Eichler, investment strategist at UBS Paine Webber.

The average stock mutual fund has fallen 10.3% a year the past three years, according to fund-tracker Morningstar. Most fund shareholders held on during the long decline, but they are starting to flee now. Investors pulled $7.7 billion from stock funds in December. More surprising, they yanked an estimated $1 billion from stock funds in January, traditionally the month when funds see the most new money. It's the first January since 1990 that money has left stock funds.

Contributing: Sandra Block, Del Jones, Adam Shell, John Waggoner

news.ft.com Lex News by email Published: Feb 25 2003 21:00 | Last Updated: Feb 25 2003 21:00

The Conference Board survey of consumer confidence was much worse than recent macroeconomic data, market movements and, indeed, the Michigan confidence survey would have suggested. The 15 per cent drop, to a level associated with past recessions, was truly awful. The prospect of war in Iraq, and terrorist threats at home, clearly have not helped the consumer mood. Yet if war was the only reason for declining confidence, this would presumably disproportionately affect the expectations component of the survey, when the current conditions index fell almost as much. Nor can the dismal assessment of labour market conditions sensibly be pinned on Saddam Hussein.

High energy costs sap consumer spending power, but the high oil price is the result of Venezuela's troubles as well as Iraq. A jobless recovery, high household debt, a forecast improvement in business spending that has not materialised, and even worse economic conditions outside the US all suggest caution. February's Conference Board reading might just be a blip. But if sustained, and reflected in the economic data, forecasts will have to be revisited and the Federal Reserve, which is hoping to wait and judge the underlying strength of the recovery once war risk recedes, will be forced to act. With bonds so expensive, stocks look a better bet. But the assumption that all will be well once the geopolitical picture clears remains a very dangerous one.

www.bday.co.za

WASHINGTON - US investment bank Morgan Stanley has lowered its global growth forecasts, warning that geopolitical tensions had pushed the  world back to the brink of recession.

"In response to mounting geopolitical tensions, we have cut our 2003-04 global economic forecast," the Wall Street titan's chief economist, Stephen Roach, said.

The global growth forecast for 2003 gross domestic product (GDP)  fell to 2.5% from 2.9%. The forecast for 2004 dropped  to 3.8% from 4.0%.

"The downward revision for 2003 has the effect of transforming an anemic recovery in the global economy into a world that is right  back on the brink of its recession threshold — 2.5%," Roach said.

The new world growth forecast was at the upper bound of a 2.0-2.5% possible outcome, Roach said.

Disrupted Iraqi output, low oil stocks and a production shortfall in Venezuela would send Brent crude oil spiralling to 40 dollars a barrel next month from about 32.50 dollars now, with only  a modest retreat in April, he said.

Even after accounting for a decline in oil prices after a successful military action in Iraq, oil prices would rise 15.6 percent over 2003, Roach said.

"There is more to this shock than oil," he said.

"Saddam Hussein's possible use of weapons of mass destruction cannot be ruled out, nor can collateral damage to Iraqi civilians, spillover effects to the Israeli-Palestinian conflict and heightened global terrorist activity," Roach added.

"Destabilizing conditions in Korea add to the problem. The split  between America and her allies only heightens the geopolitical instability factor. Nor is there any certainty about the stability of post-Saddam Iraq."

The world had built up a cumulative gap of 3.5 percentage points  between long-term potential growth and actual growth over 2001-2003, the economist said.

The forecast for 2003 economic growth would not make much of a dent in that output gap, he said, raising the risk of deflation. "I  think it makes sense to remain in the deflation camp even in the face of higher oil and other commodity prices," Roach said.

Among the major economies, Morgan Stanley forecast:

 - The US economy would grow 2.1% this year, rising to 4.1% next year.  - Europe would grow 0.8% this year and 2.3% next year, with the 12-country euro zone expanding 0.6% this year  and 2.3% next year.

• Japan would grow 0.6% this year and 0.5% next year.   "As the world gears up for war, it is far more vulnerable than it was in 1990-91," Roach said.

"In large part, that is because today's US-centric global economy lacks the broadly-based support that a more balanced global  economy had a dozen years ago."

Over the seven years from 1995 to 2002, the United States accounted for 64% of the cumulative increase in world GDP, he said.

"Japan has been mired in a post-bubble malaise and the euro-zone  growth dynamic has taken on a new sluggishness. Growth in Asia ex-Japan has remained brisk but well below the heady gains of the late 1980s. Meanwhile, Latin America has fallen victim to yet another in a long string of crises," Roach said.

Wells Fargo and Co. economist Scott Anderson said another economic shock such as higher oil prices or declining consumer confidence might hold back a US recovery.

"We suspect the US economy will continue to muddle through, like  last year, for much of 2003," he said in a report.

"Looking past a war in Iraq, it is clear that even a quick and decisive victory will not solve some of our major economic problems. Global growth is stalling, particularly in Europe and Japan."   Sapa-AFP