US economy may not surge after war

A US B-52 bomber lands at Fairford Royal Air Force base, Gloucestershire, England on Monday. A fleet of US B-52s arrived as Washington continues it's military build-up ahead of a possible conflict with Iraq. PHOTO: REUTERS

To hear Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow tell it, the US recovery is being held back by war jitters and the economy may thrive once the standoff with Iraq is resolved.

The unwillingness of companies to invest or hire and the history of the 1990-1991 Gulf War suggest they may be wrong.

Factory use hasn't rebounded from the almost two-decade low reached in December 2001 and probably won't even after the conflict ends, some executives and economists say. A sounding of 1,200 members of the National Federation of Independent Business found that only 8 percent cited ``the political environment'' as a reason not to expand.

Getting the war over quickly may ease anxiety, "but I don't think it's going to make that big a difference" for the economy, said Harry Kraemer, chairman and chief executive officer of Baxter International, the world's biggest blood-treatment maker.

"There is overcapacity if you look across most of the basic industries," Kraemer said, and job-creation has lagged.

"We don't see a strong case that geopolitical risks are playing much of a role in the current soft patch in the economy."

Ira Kaminow, chief economist for Capital Insights Group

The issue is important because Congress, the Fed and the White House are making decisions on what cures to prescribe for the economy. President George W. Bush and many Republicans want Congress to cut taxes to spur growth. Greenspan wants to put all stimulus measures on hold.

There's no doubt the threat of war has had an impact on the economy. Oil prices, the most visible barometer, have soared more than 60 percent over the past year, to US$35.88 a barrel.

Economists say oil prices that high hurt confidence and slow economic growth. Consumer sentiment fell to nine-year lows last month, prompting some economists to predict that consumer spending will decline as well.

Market analysts attribute the continued decline of stocks to war fears. The Standard & Poor's 500 index has plunged 29 percent from a peak of 1,170.29 last March 19.

"The Iraqi situation is having a decided, negative effect on economic activity," Treasury Secretary Snow said at a finance ministers' meeting last month, suggesting that economic weakness is only temporary.

Fed Chairman Greenspan has expressed similar views, and some company leaders agree.

In a survey issued yesterday, the National Association of Manufacturers found that 68 percent of companies expect the economy to rebound quickly once hostilities end. The 14,000-member organization's poll also showed that manufacturers are delaying hiring and investing until after an Iraq confict.

At the same time, other economists and executives argue that more is weighing on the economy than the prospect of war. While the US economy grew 2.4 percent last year, factories ran at just 75.7 percent of capacity in January, eight percentage points below the pre-recession rate. Economists surveyed by Bloomberg News projected no change in the February rate.

"There's still excess capacity in most industrial segments of the economy," Jeffrey Immelt, chairman and chief executive of General Electric Co said last month. "To cure that will take time."

A survey of chief executives last month by the Business Council, which represents 180 of the nation's biggest companies, found that only 40 percent of the executives polled said war worries had prompted them to alter their plans for this year. A Gallup poll in February found that 88 percent of workers said economic woes, not war talk, were holding their employers back.

"We don't see a strong case that geopolitical risks are playing much of a role in the current soft patch in the economy," said Ira Kaminow, chief economist for Capital Insights Group, a Washington economic consulting firm.

"Much of the recent economic weakness can be explained by more traditional factors," such as excess capacity and a glut of office buildings.

As a result, he said, there will be little kick to the rebound when the standoff with Iraq is resolved.