Washington, March 19 (Bloomberg) -- A quick, decisive victory in Iraq by U.S. and allied forces may revive the stalled U.S. economic recovery. Something less may push the world's biggest economy back into recession. The removal of Saddam Hussein would bolster consumer confidence, stimulate business investment and further reduce oil prices, economists, executives and investors said. A drawn-out war would push crude prices back up, slow consumer spending, weigh on stock prices and lead to economic slowing, they said. As the U.S. moved to resolve the standoff, crude oil yesterday had its biggest drop in 16 months, by 9.3 percent to $31.67 a barrel.
``The uncertainty surrounding the war has got everyone in a state of paralysis,'' said Don Brock, chairman of Astec Industries Inc., a maker of road-building and construction equipment based in Chattanooga, Tennessee. ``We have customer after customer just waiting to spend money. They're not adding capital goods until we get a resolution.'' Since September, when President George W. Bush told the United Nations that the U.S. would forcibly remove Iraq's Saddam Hussein if he refused to disarm, the recovery from the recession that began in March 2001 has stalled. Some companies have delayed hiring and investment as they waited to see whether war would push the U.S. back into recession. The economy lost 308,000 jobs in February, the third decline in four months. Retail sales last month dropped 1.6 percent, the biggest decrease since November 2001, and the University of Michigan's preliminary March consumer sentiment index fell to 75, the lowest since 1992. The Standard & Poor's 500 Index lost 6.3 percent before rebounding this week, and oil prices surged 16 percent, touching 12-year highs before this week's plunge.
Fed's Stance
The Federal Reserve yesterday acknowledged ``the hesitancy of the economic expansion,'' saying it ``appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties.'' Fed policy makers left the benchmark overnight bank lending rate at a 41-year low of 1.25 percent and said that as the ``uncertainties lift,'' the low rates ``will provide support to economic activity sufficient to engender an improving economic climate over time.'' U.S. investors expecting a short war have begun to reverse a two-month bond market rally that pushed Treasuries to the highest prices since the mid-1950s. Stocks rose as investors bet companies such as retailer Wal-Mart Stores Inc., software maker Microsoft Corp. and bank J.P. Morgan Chase & Co. will benefit from an economic rebound. Some manufacturers are optimistic the U.S. economy will surge once a war is over, a National Association of Manufacturers survey found. Sixty-eight percent of manufacturers said the economy will recover ``quickly'' once hostilities subside. Less than a quarter of the companies said a war would have a ``significant'' impact on the economy.
1991 Gulf War
Economists and executives are basing their forecasts at least partly on the U.S. experience in the 1991 Gulf War. Stock prices and consumer confidence tumbled in the months before hostilities broke out, and oil prices more than doubled, soaring to $40.15 a barrel from $15.55 at the pre-war low. Oil prices fell by almost a third the day coalition forces began air attacks against Iraq. The S&P 500 had its biggest percentage gain in more than three years that day and returned to prewar readings before the end of the six-week war. The Conference Board's consumer confidence index, which fell by more than a quarter after Iraq invaded Kuwait, recovered almost the entire decline in the month after the war ended Feb. 28, 1991. The U.S. economy began to pull out of recession within a month. Stock prices and consumer confidence surged while oil prices tumbled. Still, the rebound wasn't as robust as some economists are predicting this time, and it was derided as a ``jobless recovery.'' The economy became a central issue in the 1992 election that put Bill Clinton in the White House.
`A Loaded Spring'
``There is a big difference between then and now,'' said Brian Wesbury, chief economist with Griffin Kubik Stephens & Thompson, a bond underwriter in Chicago. ``Back then we had a credit crunch. This time we do not. The economy is a loaded spring right now that is being held back by uncertainties about war. Once that dissipates, the economy will actually surge.'' Even a quick victory would have economic casualties. The tourism and travel industries, reeling since the Sept. 11 terrorist attacks, will suffer again, the Air Transport Association said. U.S. airlines may face additional losses of $4 billion this year after a war starts. The industry would respond by cutting 70,000 more jobs and 2,200 daily flights, the airline industry group said, based on its ``most likely'' war scenario.
Costs of a Short War
In a computer study conducted for the non-partisan Center for Strategic and International Studies in Washington, Macroeconomic Advisers LLC of St. Louis concluded that a war of four to six weeks would slow economic growth in 2003 by 0.2 percentage point in the U.S. and about 0.1 percent point in the larger European countries and Japan -- an impact that would be hardly noticeable. ``The longer the war goes on, the more detrimental an effect it will have, particularly if it extends beyond a few weeks or so,'' said James Hlavacek, chief operating officer of America Trans Air, the 10th-largest U.S. airline. Some executives and economists argue that more is weighing on the economy than the prospect of war. While the U.S. economy grew 2.4 percent last year, factories ran at 75.6 percent of capacity in February, eight percentage points below the pre-recession rate. A conflict lasting three to six months in which much of Iraq's oil-drilling facilities were damaged would subtract as much as 4.4 percentage points from real growth in the U.S., Macroeconomic Advisers found. In addition, growth would drop between 2.4 and 3.7 percentage points in the large European countries and 3.3 percentage points in Japan. Global recession would result.
Doomsday Scenarios
Doomsday scenarios include an Iraqi attack on Saudi Arabian oil fields, crippling the world's biggest oil producer, and an attack on Israel, setting off an exchange of nuclear, chemical or biological weapons. While war may increase sales for defense contractors such as Northrop Grumman Corp. and Lockheed Martin Corp., most other industries would suffer. Companies from airlines and trucking companies to chemical makers and manufacturers would face higher costs for energy. ``If we should run into complications in Iraq, oil prices will go high, and there's a very good probability that we'll be back in a recession,'' said Tony Raimondo, chairman and chief executive officer of closely held Behlen Manufacturing Co. in Columbus, Nebraska. Behlen makes fabricated metal products ranging from structural steel to grain silos. Every $5-a-barrel increase in crude-oil prices that holds for six months or more reduces economic growth in the U.S. by 0.3 percentage point and boosts consumer prices by 0.3 percentage point, says John Felmy, chief economist for the American Petroleum Institute, the industry's trade group.
Higher Oil Prices?
War complications may push oil prices as high as $75 a barrel, said Yale University professor William Nordhaus in a written report. That would cut real U.S. economic output by $175 billion, or 1.7 percent of gross domestic product, in the first year and $778 billion over the course of the following decade as costs mounted to import oil, he said. ``Everybody expects a quick victory, but until you get there, there are too many things that could go wrong,'' said David Dreman, who manages about $6.5 billion at Dreman Value Management LLC in Jersey City, New Jersey. ``The worst case scenario is more complex.'' //www.quote.bloomberg.com