Washington, March 4 (Bloomberg) -- To hear Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow tell it, the U.S. recovery is being held back by war jitters and the economy may thrive once the standoff with Iraq is resolved. The unwillingness of companies to invest or hire and the history of the 1990-91 Gulf War suggest they may be wrong. Factory use hasn't rebounded from the almost two-decade low reached in December 2001 and probably won't even after the conflict ends, some executives and economists say. A sounding of 1,200 members of the National Federation of Independent Business found that only 8 percent cited ``the political environment'' as a reason not to expand. Getting the war over quickly may ease anxiety, ``but I don't think it's going to make that big a difference'' for the economy, said Harry Kraemer, chairman and chief executive officer of Baxter International, the world's biggest blood-treatment maker. ``There is overcapacity if you look across most of the basic industries,'' Kraemer said, and job-creation has lagged.
The issue is important because Congress, the Fed and the White House are making decisions on what cures to prescribe for the economy. President George W. Bush and many Republicans want Congress to cut taxes to spur growth. Greenspan wants to put all stimulus measures on hold. There's no doubt the threat of war has had an impact on the economy. Crude oil prices, the most visible barometer, have soared 64 percent over the past year, to today's $36.89 a barrel on the New York Mercantile Exchange for April delivery, up 2.8 percent from yesterday. Economists say oil prices that high hurt confidence and slow economic growth. Consumer sentiment fell to nine-year lows last month, prompting some economists to predict that consumer spending will decline.
Auto Production Cuts
General Motors Corp. and Ford Motor Co., the world's No. 1 and No. 2 automakers, said they would cut North American vehicle production in the second quarter after February U.S. auto sales declined. The heaviest Northeast snowfalls in seven years and the threat of war in Iraq kept shoppers out of showrooms.
``People are just holding back as we get closer and closer to something happening'' in Iraq, said Art Spinella, whose CNW Marketing/Research in Bandon, Oregon, tracks auto prices. ``The people who are new car intenders aren't buying no matter what you throw at them.'' Treasury Secretary Snow said at a finance ministers' meeting last month that ``the Iraqi situation is having a decided, negative effect on economic activity,'' suggesting that economic weakness is only temporary. Fed Chairman Greenspan has expressed similar views, and some company leaders agree.
Stocks, Bonds
U.S. stocks fell for a second day amid concern the U.S. will attack Iraq without United Nations support, further reducing consumer confidence and crimping corporate profit growth. The Standard & Poor's 500 Index fell 12.82 points, or 1.54 percent, to close at 831.99, and the Dow Jones Industrial Average dropped 132.99 points, or 1.7 percent, to close at 7704.87. Treasuries advanced for a seventh day as some investors sought the safest securities amid mounting speculation the U.S. will lead an attack on Iraq this month. The Treasury's benchmark 3 7/8 percent note maturing in February 2013 gained more than 1/8 point, pushing the yield down 2 basis points to 3.65 percent. A basis point is 0.01 percentage point. Some economists and executives 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 just 75.7 percent of capacity in January, eight percentage points below the pre- recession rate. Economists surveyed by Bloomberg News projected no change in the February rate.
Immelt's Verdict
``There's still excess capacity in most industrial segments of the economy,'' Jeffrey Immelt, chairman and chief executive of General Electric Co. said last month. ``To cure that will take time.'' A survey of chief executives last month by the Business Council, which represents 180 of the nation's biggest companies, found that only 40 percent of the executives polled said war worries had prompted them to alter their plans for 2003. ``We don't see a strong case that `geopolitical risks' are playing much of a role in the current `soft patch' in the economy,'' said Ira Kaminow, chief economist for Capital Insights Group, a Washington economic consulting firm. ``Much of the recent economic weakness can be explained by more traditional factors,'' such as excess capacity and a glut of office buildings. Company managers are making their own decisions. Chief executives polled by the Business Council said that whatever happens in the standoff with Iraq, they're holding inventories and capital spending level and expecting growth to stay the same.
Lessons From History
``Long-term, things like the situation in Iraq certainly are important, but you don't want to delay your business plans over them,'' said George Strickler, chief financial officer of BorgWarner Inc., the world's largest maker of turbochargers, in an interview. ``It's not something that would alter what we do -- those things are driven by demand.'' The aftermath of the conflict with Iraq 12 years ago supports the argument that resolving the situation won't necessarily spur expansion. In that case, while oil prices fell by one-third in the two months after the U.S. launched its first air attacks, they remained high for three more months. Even as the Wilshire 5000 stock index rose after the U.S. invaded Iraq, the Conference Board's index of business confidence was at 39 in March 1991, a month after hostilities ended. It didn't rebound above 50, indicating expansion, until June. The unemployment rate kept rising after the war to peak at 7.8 percent in June 1992.
What's Different
``The war only managed to briefly interrupt the overriding macro theme of the day, addressing the lingering excesses of the late 1980s real estate-debt bubble,'' said David Rosenberg, chief U.S. economist for Merrill Lynch. The situation is different this time, said Tom Gallagher, political analyst for International Strategy & Investment, a Washington consulting firm. The Gulf war removed threats to stability caused by Iraq's invasion of Kuwait. Now, ``even a quick and clean outcome to an Iraq war would leave in place many uncertainties -- about the Middle East, the terrorism risk in the U.S. and geopolitical risks elsewhere in the world,'' such as North Korea, Gallagher said. //www.quote.bloomberg.com