Little hope seen for post-war boom in US


  • Business
  • Tuesday, 08 Apr 2003

WASHINGTON: The US economy seems to have all but stalled in recent months – or perhaps even contracted – and a raft of gloomy data have economists worried that a revival may be difficult even if the Iraq war ends swiftly. 

Nervous that the war would hurt their sales, many businesses had frozen 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 TV 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 of 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 Centre 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.” 

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

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

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% or more to keep the unemployment rate from rising. 

GDP, which measures all output within US borders, grew in the fourth quarter last year at an anaemic 1.4%. 

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 the year. It slipped 0.4% in February after a 0.2% decline in January. 

“I don’t think this economy is going to be able to show more than 2% 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%, 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%. But in a Reuters poll taken Friday, nine of 21 top bond dealers predicted a rate cut sometime between now and the end of June. – Reuters  

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