Federal Reserve Chairman Alan Greenspan spent two months saying the war in Iraq was impeding the US recovery. Now that the fighting is over, the world is about to see whether he was right.
The most recent indications are that the US growth rate probably won't exceed 2.2 percent this quarter, based on an April 10 Blue Chip Economic Indicators survey, and for all of this year will amount to no more than two-thirds the 3.6 percent average of the 1992-2000 boom. Consumer spending shows no sign of picking up, and with less than 75 percent of factory capacity in use, neither does business investment.
"Even once the war is over, US consumers and corporations will still be going back to a smothered economy," said David Wyss, chief economist for Standard and Poor's, the New York credit rating firm. "Growth in the US, and around the world, will continue to be lackluster at best."
A new round of forecasts as the war began winding down reinforced that conclusion. The International Monetary Fund predicted April 9 that the US economy will grow 2.2 percent this year, down from its 2.4 percent September forecast and not fast enough to create jobs. On April 11, the Business Roundtable, a group of 150 chief executives, also put US growth this year at 2.2 percent.
"What we're seeing is a continuing trend of a weakening economy," said John Dillon, chief executive of International Paper Co and the Roundtable's chairman.
Malaise in the US, the world's biggest economy, has repercussions worldwide. With most European economies still growing more slowly and Japan's almost stagnant, the US is the only likely engine for global growth. Both Europe and Japan rely on exports. The IMF now estimates growth in the 12-nation euro area this year at 1.1 percent and Japan's at 0.8 percent.
US President George W. Bush has put the economy on the front burner, hoping to avoid the fate of his father, George H.W. Bush, who won a war against Iraq in 1991, lost his bid for reelection a year later after voters said he wasn't doing enough to boost jobs and growth. The current president is leading a campaign by two dozen administration officials in support of his 10-year, US$550 billion tax-cut plan to stimulate the economy.
At the same time, the war was so short that the benefits of falling oil prices and more stable stock prices won't be big enough to provide an economic push, says Donald H. Straszheim, a former Merrill Lynch & Co chief economist who is now a consultant in Santa Monica, California.
"It wasn't war jitters holding back the economy and equities, it was economy jitters holding back the economy and equities," Straszheim said in a letter to clients April 15.
The behavior of stock prices reflects that. After surging 12 percent March 11-21 to 895.79 as the war kicked off, the Standard & Poor's 500 Index has since stalled, averaging 875.
That was no surprise to Richard Fuld, chief executive of Lehman Brothers Holdings Inc. He had predicted stock prices would "certainly pick up" with the battlefield successes. Then, he said, "after a short time investors will fall back and look at the reality of the economy."
The most recent statistics suggest the economy may remain weak for most of this year.
"The economy is a struggle right now," said John Devine, the chief financial officer of General Motors Corp, the world's biggest automaker, in an interview with Bloomberg Television.
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