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WAR WITH IRAQ

Conflict's End May Not Spur Economy

Washington policymakers are running short of monetary and fiscal policy weapons to use to jump-start a revival

March 30, 2003|Peter G. Gosselin and James F. Peltz | Times Staff Writers

WASHINGTON — Since 2000, the U.S. economy has stubbornly refused to be knocked off its blocks by war, terror and a stock market plunge. But it has just as stubbornly refused to resume the robust growth that Americans enjoyed only three years ago.

Despite recent predictions that a quick U.S. victory in Iraq would finally spark a full-scale revival, a growing number of executives and analysts are concluding that win, lose or draw, the economy is not going to snap back anytime soon.

Indeed, they say, a nascent recovery that was underway last summer and fall has faltered -- the victim of geopolitical risk, an investment-shy corporate sector and a potentially tapped-out consumer. The economy may actually have shrunk slightly in the last two months.

"I thought we were finally coming back," said veteran New York economist Maureen F. Allyn. "But the bits of bad news kept piling up.

"The U.S. economy has more to worry about than war. It seems to be stuck between recession and recovery."

Signs are showing up in ways big and small. Railroads are a reliable economic barometer. In good times, the backlog of cars, clothes and consumer appliances awaiting shipment is large.

But now, said James Young, chief financial officer of rail giant Union Pacific Corp., "a lot of our customers are seeing softness" in their sales.

"They are taking it day by day," he added.

Real estate and home furnishings have been among the economy's hot spots until recently. But those sectors have begun to cool as war, continued stock market worries and fear of job losses take their toll on consumers.

"My bedrooms are $4,000 to $8,000, and people are going to have to have a lot more confidence before they start spending that kind of money on the inside of their house," said Larry Parnell, president of Lanpar Inc., whose Oakwood Interiors in Ontario manufactures upscale bedroom sets.

Parnell said consumers were still "six months to a year away from regaining their confidence" and returning to furniture showrooms in droves, no matter how the war goes.

Behind such sober assessments are growing doubts that a U.S. military victory abroad can translate swiftly and easily into a full-blown recovery at home.

To be sure, the beginning of the invasion by American-led troops quickly trimmed oil prices from their nearly $40-a- barrel peak, and that's been an economic help.

What's more, as market euphoria about the war's early U.S. battlefield successes demonstrated, a decisive win can drive up stock prices, which also would help.

The problem is that the economy already has imbibed substantially more powerful tonics than lower oil prices and somewhat higher stock prices without regaining its former glow.

It has been operating with four-decade-low interest rates for at least eight months. And it has received what's arguably the largest jolt of fiscal stimulus in the nation's history relative to the size of the downturn. But still no strong recovery has emerged.

Federal Reserve Chairman Alan Greenspan has said that a war victory's most important effect would not be on oil or stock prices but on removing the uncertainty over the conflict in Iraq that is weighing on the economy.

But even Greenspan appears to have doubts about how much of a boost an end to the war would give the economy. In its latest report to Congress, the Fed lowered its growth forecast and raised its unemployment forecast for this year, even though most of the year presumably will be spent out from under worries about the war's outcome.

Some independent analysts dismiss the Fed chairman's views about victory's beneficial effects on the economy as grasping at straws.

"Greenspan is wrong" about the link between war and recovery, said John H. Makin, an influential economist with the conservative American Enterprise Institute in Washington. "It's total nonsense and a distraction."

But if Americans can't depend on a war win to kick the economy into high gear, they will have to rely on one of two other options -- neither of which, many analysts say, is appealing.

They could hope for another blast of interest rate reductions, tax cuts or government spending hikes to return the economy to full health. Or they could wait -- perhaps another year or more -- for individuals and businesses to finish working through the problems of the stock market and tech bubbles of the last decade.

"It's not a very pretty picture, especially compared with what we got used to in the 1990s," said John W. Mitchell, a senior economist with U.S. Bancorp in Portland, Ore.

Policymakers say they are ready to act if the economy doesn't bolt forward after the war, but Washington is running short of monetary and fiscal policy weapons to use.

The Senate voted last week to slice in half the $725-billion tax cut that Bush had proposed to spur the economy. Although administration officials talked bravely of restoring the lost cuts and winning passage of the entire package, analysts said that seemed unlikely.

Sending a Signal

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