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Little hope for post-war boom in US economy

April 07, 2003 12:26 IST
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The US economy seems to have all but stalled out in recent months -- or perhaps even contracted -- and a raft of gloomy data have economists worried a revival may be difficult even if the Iraq war ends swiftly.

Nervous that the war would hurt their sales, many businesses froze hiring and cut their investment budgets in the run-up to the US-led attack on Iraq, now in its third week.

Consumers, stalwart even in the depths of the recession that began in 2001, pulled back in the first two months of 2003 after a car-buying spree late last year.

However, the so-called CNN effect on consumers has proved limited. Defying some fears that they would stay at home glued to the television once the war began, anecdotal reports suggest they did keep shopping.

Yet an increasingly bleak jobs picture might keep them wary of spending too freely, which in turn would deprive the economy of a strong engine for growth.

"The recovery, which is very fragile, may have actually turned into a downturn a few months ago," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

"Because consumption is weak, imports are falling and that may give (gross domestic product) a statistical bounce to get it into positive territory in the first quarter," he added.

A psychological lift

As US-led forces pushed toward Baghdad last week, Wall Street celebrated hopes for a near-term resolution to the fighting. The Dow Jones industrial average recorded a 1.6 per cent gain for the week and the technology-laden Nasdaq moved up 1 per cent.

Profit warnings from technology firms tempered the euphoria on Nasdaq, leading it to close Friday on a negative note.

US forces on Sunday said they had almost encircled Baghdad. If President George W. Bush proves correct in his predictions of rapid gains toward the US goal of ousting Saddam Hussein's government, stocks could advance further and consumers would get a psychological lift.

However, military success may not automatically lead to an economic upswing.

"The question is, will we also see a pickup in business spending?" said Douglas Lee, president of Economics from Washington.

Even if the end of the war does unleash corporate spending, the job market will need time to return to health. Typically, the economy needs to expand at a rate of around 3 per cent or more to keep the unemployment rate from rising.

GDP, which measures all output within US borders, in the fourth quarter of last year grew at an anemic 1.4 per cent.

The government will release its estimate of first-quarter GDP on April 25. Economists are braced for a paltry growth figure since consumer spending, which drives two-thirds of economic activity, fell on an inflation-adjusted

basis in the first two months of this year. It slipped 0.4 per cent in February after a 0.2 per cent decline in January.

"I don't think this economy is going to be able show more than 2 per cent growth for the year," said Roger Kubarych, a former Fed economist who is now economic adviser to Hypo-Vereins Bank.

The latest payroll report has added to concerns. The number of workers on US payrolls slid 108,000 in March, bringing the total job losses for the two most recent months to 465,000. In one piece of good news, the unemployment rate stayed steady at 5.8 per cent, instead of rising as many analysts had expected.

Economists said the jobs report was not dire enough to prompt the Federal Reserve to cut short-term interest rates from their four-decade low of 1.25 per cent. But in a Reuters poll taken Friday, 9 out of 21 top bond dealers predicted a rate reduction sometime between now and the end of June.

Central bank officials, who are on "heightened surveillance" about the economy, have been debating internally whether the main source of economic woes is the war or deep-seated problems with the American business sector.

Soft patch is lingering

Regardless of the causes, even policymakers are surprised by the extent of economic sluggishness -- which they have repeatedly described as a "soft patch."

Administration officials, trying to drum up support for Bush's proposal for a $726 billion tax cut that is being debated in Congress, have acknowledged the economy is not firing on all cylinders.

"I think the economy has slowed somewhat and isn't performing where we'd want it to perform," US Treasury Secretary John Snow told reporters on Friday.

However, Snow, speaking to reporters in Fort Lauderdale during a swing through Florida to talk about the tax bill, said he did not think a recession was likely.

"I don't think that we're headed to a double-dip," Snow said.

The International Monetary Fund last week predicted that the US economy would ride out its weakness. It said chances of a recession have fallen to just 15 per cent from a peak of 53 per cent just before the 2001 slump.

But the grim jobs numbers, a plunge in durable goods orders and weak factory activity have led some private economists to see a greater risk of a "double dip" recession, or second leg to the 2001 downturn.

Most private analysts think the economy could skirt on the edge for the next few months, possibly gaining momentum by the second half of the year.

But there are few who now expect a quick post-war boom.

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Source: REUTERS
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