War clouds cast long shadow on U.S. economy
Sunday January 19, 7:34 am ET
By Tim Ahmann
WASHINGTON, Jan 19 (Reuters) - A cloud of uncertainty from the prospect of a U.S. war with Iraq is casting a dark shadow on the world's richest economy, which entered the new year with a worrying lack of momentum, economists say.
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Relentlessly weak data released in the past few weeks are making what the Federal Reserve last year dubbed a "soft patch" look potentially more ominous and lasting.
"I think the prospect of a war in the Middle East is exerting a very big drag on things," said Doug Lee, who heads the consulting firm Economics from Washington.
Lee and other economists said questions over how a war might unfold and the impact it could have on the U.S. economy -- either through higher oil prices or lower consumer confidence or both -- was hurting growth.
Throw in the loss of around $7 trillion in stock market wealth, mix with shrinking payrolls, and economists say you have a dismal brew that raises the chances an already sluggish economy could slow further.
Economic growth braked sharply as it moved from the third quarter of last year into the fourth and it appears to have lost more impetus in the waning weeks of the year.
U.S. employers cut 101,000 workers from their payrolls in December and industrial production fell as well. Incentives from carmakers gave a boost to retail sales last month, but without autos, the key holiday shopping season looked grim.
Consumers' moods have also darkened. A survey out Friday from the University of Michigan showed consumer sentiment soured in early January as concerns over the future mounted.
"The economy remains very erratic. It does not appear able at this point to shake off its recent funk," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis.
Still, many analysts argue that with a quick end to the U.S.-Iraq showdown and little American blood shed, the economy will pick up steam in the second half of the year.
"Overall, the economy does not appear to be at risk of falling into recession," Reaser said. "If we were to resolve the Iraqi situation overnight ... the markets and the economy probably would rebound quite significantly."
WAITING, WONDERING
For now, however, businesses remain reluctant to commit to new hiring or new spending on facilities or equipment. A collapse in business investment led the U.S. economy into recession in early 2001 and analysts say a rebound there is key for a solid, sustained recovery.
In a recent survey of 102 businesses by the National Association for Business Economics, the possibility of a longer-than-expected war was cited as the main risk to the firms' bottom lines.
"I think a lot of firms are looking at the current situation and saying, 'Why don't I wait until we either have or don't have a war here and then I'll start thinking about expanding my plans,'" said Ethan Harris, co-chief economist at Lehman Brothers in New York.
But more than the threat of war weighs on the economy.
"When I speak to clients they raise Iraq as the number one impediment," said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. "It's clearly a main issue, but in the case of businesses I really wonder whether that's all there is to it."
Tannenbaum said a prolonged squeeze on corporate profits may be playing an even bigger role.
"There's no better tonic for hiring or inventory investment or putting in new equipment than better profitability," Tannenbaum said. "To me that's the more fundamental and lasting reason why business are not willing to commit."
Like Tannenbaum, Harvard University economics professor Dale Jorgenson thinks the problems go well beyond war fears.
"If you think about the loss of wealth in the market (since its early 2000 peak), the standard estimate is around $7 trillion," he said. "That's a lot of money even for a country like the United States. It amounts to three-quarters of a year's GDP, it's about a quarter of our national wealth."
"That is something that was there two years ago and it isn't there today," Jorgenson said. "I think the fact is that the economy is undergoing a kind of modest financial crisis in which people are wondering how it is all going to play out." |
