War will hit local economy
By Sandra Jones and James B. Arndorfer
Crain's Chicago Business
March 17, 2003
A war in Iraq will deal another blow to Illinois’ already fragile economy. Even as the Department of Defense prepares to spend a minimum of $500 million of its war budget in the state—and Illinois companies have already produced everything from fighter-jet engine parts to Gatorade for the Middle East buildup—the overall drag on airlines, hospitality businesses and consumer spending will quickly offset any lift in defense spending.
“The war will be hard on the Chicago economy, because it’s still mired in a recession,” says Mark Zandi, chief economist and co-founder of Economy.com Inc., a Pennsylvania-based research firm.
Chicago is among the roughly 100 of the nation’s 300 major metropolitan areas that remain in recession, according to Economy.com. Illinois has emerged from the recession, but has yet to show growth.
Many retailers, travel experts and business executives are hoping that a quick and decisive victory in Iraq will lift the malaise that has dampened spending in Illinois and spark a surge of shopping, dining and capital investment.
Unfortunately, a growing contingent of experts are beginning to believe that little will change after the war, and indeed, that the situation could get worse. Mr. Zandi puts the chance that the U.S. economy falling back into recession at one in three, odds he terms “very high.”
“There’s a fundamental loss of economic momentum that has nothing to do with the war,” says Asha Bangalore, an economist at Chicago-based Northern Trust Co.
“People are hoping that the consumer will come back and provide the stimulus to growth. I don’t think that’s going to happen.”
Consumers have been on the front lines of the economic battle for the past two years, keeping the economy growing as businesses hunkered down in the trenches, curbing spending and delaying hiring.
Consumer spending accounts for two-thirds of the U.S. economy. In Illinois, retail sales alone—only one slice of consumer spending—last year accounted for $152 billion, or about one-third of the state’s estimated $480-billion economy.
But, in the past two months, consumers have been signaling that they are spent. They’ve taken on too much debt, saved too little and watched their retirement savings continue to shrink.
“I don’t see a whole lot of pent-up demand for much of anything,” says Thomas A. W. Miller, managing director at RoperASW, a New York-based market research firm that tracks consumer behavior. “The war isn’t going to make it any better. You can just see people sticking money in their mattress for a while.”
About 60% of U.S. consumers say that a war would affect their willingness to spend, according to a RoperASW survey conducted in December. Indeed, out of six factors that influence consumer buying decisions, war ranked No. 2 after personal income—outweighing personal debt, job security, the direction of the stock market and the value of investments.
Complete coverage of this story appears in the March 17 issue of Crain’s.
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