The War Goes Well. So Where's the Dividend?
By STEVE LOHR
<<Aparently, there is people that doesn't know that the war was to take, from the publci eyes, the deep underlying structural problems of the US economy.>>
nytimes.com
HE images of military triumph from Baghdad last week, as Saddam Hussein's statue and his regime toppled, brought a measured sigh of relief from the business world. Economists' worst fears about the impact of the Iraqi war had not materialized. American casualties were limited. There were no big oil-field fires, and no terrorist reprisals yet on American soil. So far, so good, it seems.
AYet business executives and economists said in interviews last week that while the progress of troops in Iraq was unquestionably good news for the economy, as one source of uncertainty recedes, it remains to be seen whether the battlefield success will prove to have been a turning point. Still unclear is whether consumer confidence and business investment will not only revive from their war-jitter depths but also begin a more sustained recovery.
The answer, the executives add, will depend partly on the longer-term geopolitical ripples that extend from the conflict in the Middle East. Can the United States military greatly reduce its involvement in Iraq soon, or will the troops be mired there in a lengthy police action? Will ousting Mr. Hussein be a step toward greater stability in the region or bring an anti-American backlash and fresh waves of terrorism?
Echoing the views of several executives, James M. Zimmerman, chairman of Federated Department Stores, said that it was "way too early to tell how the end of the war" would affect his company's chains, which include Bloomingdale's and Macy's. Yet Mr. Zimmerman said he was struck by the fact that stock prices barely moved after American troops seized control of the major government offices and the Hussein family palaces in Baghdad last Wednesday — a Wall Street shrug, he said, that "clearly indicates that there are other factors at work in the economy that have as much, if not more, impact on what we can expect to see in the weeks and months ahead."
The economy, executives and economists note, faces a litany of uncertainties beyond the war — including an alarming rise in jobs lost, rising state and federal deficits, and signs of a retreat from the commitment to free trade and globalization. Individual industries are confronting their own challenges, from the falloff in travel to Asia because of fears of severe acute respiratory syndrome, or SARS, to the enduring slump in the information technology and telecommunications businesses.
"We had this big cloud in front of us called Iraq," said David Wyss, chief economist of Standard & Poor's. "But we're still not sure what smaller ones are behind it."
The war has clearly hit American business — trimming perhaps half a percentage point off economic growth in the first half of this year, economists estimate.
The prospect of war in the early months of the year added to the uncertainty in an already shaky economy, prompting companies to put off some investments and some consumers to forgo costly purchases. Once the bombing began on March 19, the distraction effect took hold as people stayed home more to watch television news of the war. Advertising and retail sales fell.
Companies have issued profit warnings recently, saying quarterly earnings would be less than Wall Street had expected and blaming the war. Some, like Barnes & Noble, point to the war as the main culprit. Others, like Siebel Systems and PeopleSoft, which sell expensive software to corporate customers, cited the war as a contributing cause. "The environment for capital spending worsened in the first quarter with added concerns about the war and its impact on the already weakened economy," said Craig A. Conway, chief executive of PeopleSoft.
Now that a crucial chapter of the war seems closed, the outlook will hinge largely on consumer and corporate attitudes, according to the executives and economists. Since last fall, consumer confidence has dropped sharply. One widely watched confidence index produced by the Conference Board, a business research group, fell from 93.7 last September to 62.5 in March, an unusually steep slide.
Despite the soft economy of the last couple of years, the auto industry has held up comparatively well. "But we are definitely seeing a weakening of demand, and it tracks very closely with consumer confidence," said Rick Wagoner, chief executive of General Motors, who was among a few dozen executives who met with President Bush at the White House last Thursday. Mr. Bush was trying to garner business support for his tax-cut proposals. The House has approved the president's plan for tax reductions of $726 billion over 10 years, but the Senate trimmed the package to $350 billion.
Some critics of Mr. Bush, as well as some economists, fear that the administration's plan will mortgage the economy's future by drastically increasing the federal deficit. |
