The Economy’s Health Is Linked to Gulf Outcome : Recession: Analysts say the length of the crisis will determine whether there is a quick rebound or a deepening slump.
The Jan. 15 deadline for Iraqi forces to leave Kuwait could also prove a fateful date for the U.S. economy, now weakened by a recession that was sparked when Iraqi troops rolled into the kingdom Aug. 2.
Analysts agree: Either a negoTiated settlement or a quick, decisive war, as envisioned by U.S. military planners, could help set the stage for economic recovery, perhaps this year. Indeed, a swift and sure finale to the crisis--peaceful or otherwise--is critical to recent forecasts that America will be out of the slump by midyear.
“It’s the uncertainty that’s really killing the economy,” declares James F. Smith, an economist at the University of North Carolina at Chapel Hill.
As last-minute diplomatic efforts to avert war continue, economists are coolly appraising how changing events in the Persian Gulf could affect hard times in the United States. Already, the fear of war is a crucial element in the financial world, as illustrated by Wednesday’s tumble in the stock market.
A tortured stalemate or an indecisive war that lasts for many months would continue to drain life from the slumping U.S. economy, experts agree.
By contrast, a fast, decisive resolution “is probably the best news you could give to oil prices and the economy,” said Joseph Wahed, chief economist at Wells Fargo Bank in San Francisco. But he warns: “It’s premature to think the war could be won in two weeks.”
The unhappy linkage between America’s economic fortunes and the Middle East crisis has taken on added meaning in recent days. Last week, White House officials acknowledged for the first time that the nation was in a recession. And a barrage of recent economic signs, including weak consumer spending, underscores how public anxiety about the crisis has aggravated the downturn.
Ordinary consumers and business leaders would breathe a collective sigh of relief in the case of a peaceful solution, economists say, providing a badly needed kick to the listless economy. War is another matter entirely: It would unleash tremendous uncertainties, depending on its nature and length, uncertainties that were reflected in Wednesday’s gyrations in the financial markets.
At first, the outbreak of fighting would rock the economy, creating an almost surreal interplay between battlefield turmoil and bedlam in financial markets. Oil prices would skyrocket, interest rates likely would rise and stocks would fall, almost in tandem with news from the front lines.
“The markets would be watching CNN. Traders would be sitting there, watching where the missiles would be landing,” said Robert D. Hormats, a former assistant secretary of state who is vice chairman of Goldman, Sachs & Co., a New York investment bank.
Throughout the world, people would await word on the condition of Saudi oil facilities, which accounted for 8.3% of global oil production in 1989, a level that has increased dramatically since the United Nations imposed an embargo on Iraqi and Kuwaiti crude oil last year.
In the initial, scary hours of fighting, the U.S. economy would go into a deep freeze, as members of the public held onto their money rather than squander it on major purchases. This consumer malaise, if it lasted very long, would threaten a chain reaction of woes affecting retailers, wholesalers and factories.
“Wars create uncertainty. Uncertainty causes caution. And caution causes a slowdown in growth,” observed Michael J. Drury, economist with the Boston Company Economic Advisers Inc.
The gyrations in the financial world might be spectacular. Oil prices--under $20 a barrel shortly before the crisis--could rocket as high as $70, according to Hormats. On the stock market, the Dow Jones industrial average could plunge 200 points, he added.
But if the United States were to take control of the battle rapidly, and--importantly--Saudi oil facilities survived intact, the pandemonium might subside with startling speed. In 48 to 72 hours, oil prices could start sinking back toward $20, Hormats estimates; stocks, bonds and interest rates would stabilize.
The public, if convinced that the crisis was past, would spend more, emboldened by lower energy prices that, in effect, would stretch their wallets. Overall, a giant question mark that has hovered over the U.S. economy since August would vanish.
“When it’s resolved, consumer confidence will shoot back up and everybody will buy something, they’ll feel so good,” predicts North Carolina’s Smith. “And that means manufacturers will put people back to work.”
None of which proves the old saw that war is good for the economy. The initial fears sparked by all-out fighting would exact a toll, even in the case of a war won swiftly by U.S. forces, maintains Jerry J. Jasinowski, president of the National Assn. of Manufacturers in Washington.
It could take up to two months for a war-fueled jump in oil prices to settle down at a lower level, he figures, leading to a more painful U.S. recession than would be the case without war. The recovery, which he expects to begin later this year, would not be pushed back, however. A “long conflict,” lasting months rather than weeks, would be required in order to significantly prolong the recession, Jasinowski predicted.
In a December analysis, the WEFA Group of economic forecasters sought to outline the implications of a brief war for U.S. economic fortunes. For the exercise, they assumed American forces speedily destroy Iraq’s air force, much of its tanks, missile batteries and chemical weapon plants.
Once such a war ended, consumer spending would rebound as lower fuel costs boost Americans’ disposable income, according to the analysis. In addition, overall U.S. defense spending would stay constant rather than decline--as it would under proposed cutbacks--providing a new stimulus for the economy.
“I don’t want to say things are better in war; the country is worse off in war,” said Kurt E. Karl, an economist with the Bala Cynwyd, Pa., firm. “But there are economic benefits that include more defense spending and lower oil prices.”
Defense spending would increase much more in the event of a longer, drawn-out war, he projects, rising a total of 15% above inflation between 1991 and 1993. “The assumption is that the military could make the case that they need more types of equipment, and different types of equipment,” Karl said.
While the prospect of heftier defense budgets may cheer some, the implications of a Persian Gulf war that grinds on for several months or longer are quite troubling for the U.S. economy.
Consumer sentiment would stay depressed, business investments would remain on hold, financial turmoil would continue and oil prices would remain high, analysts say. Thus a recovery from the recession would be more elusive, perhaps slipping into late 1991 or beyond.
“Exactly what has taken place in recent months would take place even longer,” said Maria Ramirez, an investment adviser in New York.
As the months droned on in a lengthy, uncertain war, economic activity in much of the world would be subdued in a climate of growing terrorist threats and political instability in the Middle East. The cost of Operation Desert Shield would pile up, adding to the federal budget deficit--and creating upward pressure on U.S. interest rates as the hard-pressed government needed even more foreign financing of its budget.
All the while, government leaders would have less flexibility to spend on constructive, long-term investments, such as education, research and development and transportation. Already, defense officials are expected to ask Congress for extra money to pay for the Middle East military commitment, which could cost $30 billion in the 1991 budget year, even without a war.
The price tag would soar if shooting starts. “Depending on the intensity of the fighting, the cost could exceed $1 billion a day,” estimates David Isenberg, a research analyst at the Center for Defense Information in Washington.
Unlike many other things, one symbol of U.S. economic power likely would do well in a war--the dollar. Despite its traditional lure for investors in times of turmoil, the dollar had little draw in the early days of the Middle East crisis last summer.
An all-out war, however, would underscore the vulnerability of such financial powers as Japan and Germany to a disruption in oil supplies, “and I think that would probably push people” into buying dollars on foreign exchange markets, Hormats said.
