As Washington decides whether to invade Iraq, uncertainty about a war is already weighing on the economy.
While consumers have not been overly discouraged by higher energy costs or the risk of another terrorist attack, business leaders are clearly hesitant to make new investments until the smoke clears.
Before going ahead with a big new project, asked Robert J. Barbera, chief economist of ITG/Hoenig, an investment firm, "wouldn't you wait a quarter?"
In the calculations of many analysts, he said, an invasion of Iraq is "90 percent likely to occur, and 80 percent likely to occur in the next 90 days."
Those probabilities may have risen with the discovery of empty chemical warheads in Iraq on Thursday, which led some investors to dump stocks in favor of government bonds, and dollars in favor of euros.
The budgetary costs of any war and future reconstruction are unknown. Even if war with Iraq never comes, though, the economy will still have received some stimulus from the upswing in military and domestic security spending since the Sept. 11, 2001, attacks. But that has not been enough to overcome the drag on investment, which began to sag as long ago as late 2000, after the technology bubble burst.
Adding to the uncertainty discouraging big companies from new investment, Barbera said, are the huge differences between the best and worst-case outlooks for war. An invasion could be quick, surgical and successful, clearing the way for a surge of investment on delayed projects. Or it could be long, messy and fraught with retaliations by terrorists.
"Geopolitical risks, such as the threat of war with Iraq, tensions over North Korea and terrorism, have added to the list of business concerns," said Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, in a speech on Tuesday. "You're not feeling like you're giving up something in growth by postponing investment," he said.
A more tangible drag on business activity is the relatively high price of oil, another consequence of uncertainty about the prospect of war. Oil prices are already up, with crude running above US$30 a barrel. Unrest in Venezuela, a leading supplier to the United States, has not helped. Higher prices for oil and its commercial byproducts are already pressuring industries from pharmaceuticals to trucking.
Analysts said they expect the price of crude oil to stay high until the US and its allies have a war well in hand.
"It is unlikely we would face major shortages of physical product as a result of any war," said Steve Turner, an oil analyst at Commerzbank in London, but "a short-term price spike in the coming three months is possible."
The removal of Saddam Hussein, on the other hand, offers a balancing factor -- greater access by the world market to Iraq's vast oil reserves, which could bring the price down over time. The range of possible outcomes for oil prices has rarely been wider, except perhaps during the last conflict in the Persian Gulf.
"The first thing we would worry about is the valuation of raw materials," said Ray Anderson, director of investor relations at DuPont, which uses tons of materials derived from crude oil in its manufacturing of plastics and chemicals. Buying financial hedges against high prices for oil byproducts is not easy. "They're just not very deep, liquid markets," he said. "We are largely, almost essentially unhedged in buying key oil-derived materials."
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