In March, as the U.S. military began its invasion of Iraq, many
American businesses feared the impact of the battle on commerce.
Yet they hoped a quick victory would provide a post-war boost to
the economy. An end to the war, they hoped, would prompt exuberant
and relieved consumers to open their wallets, depress the price of
oil, lead to increased spending on domestic travel, and allow
companies to more easily make plans for capital spending.
Unfortunately, it does not appear that a post-war boom is
likely. In fact, many economists and businesspeople now worry that
America actually is headed for another recession--one that could
prove the final blow to many small companies already struggling
from more than two years of economic weakness.
The signs are not good. A well-known index of economic
indicators, the Conference Board report, fell in March; meanwhile,
March's index by the Institute of Supply Management, the
nation's leading forecaster of manufacturing activity, dropped
below 50, signifying that the manufacturing sector is contracting,
and employers eliminated more than 100,000 jobs in March, after
slashing nearly 300,000 the month before. Overall, companies are
hiring at their slowest pace in more than a year. "It does
appear increasingly likely that we're headed for another
recession," says Robert E. Scott, an economist at the Economic Policy
Institute, a Washington, DC, think tank.
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"It's one of the most difficult periods I've ever
seen," concurs Al T. Lubrano, president of Technical
Materials Inc., a Lincoln, Rhode Island, company that
manufactures specialty metal products. "Where's the hope
on the other end?"
Unlike in the past, economists say, this war has not--and will
not--provide much stimulus for U.S. economic growth. "Despite
the defense spending for the Iraq war, the amount of spending this
time is still quite small, proportionally, compared to previous
conflicts," says John Nye, an associate professor of economic
history at Washington University in St. Louis, Missouri.
What's more, the end of the war in Iraq has not
significantly reduced the uncertainty felt by many Americans--an
uncertainty that keeps consumers from spending as much as possible
and prevents businesses from making long-term plans. Although the
price of oil has dropped, America still remains dependent on
potentially unstable nations--Nigeria, Venezuela--for a
considerable percentage of its petroleum.
Many U.S. businesses and consumers remain unconvinced that
another war is not on the horizon. "The victory in Iraq
hasn't resolved this uncertainty, because we don't know it
will be the last conflict," says Joel Marks, executive
director of the American Small Business Alliance, a Washington, DC,
trade group. "Given the fact that we're continuing to
fight against terrorism, we don't know that we won't have a
conflict soon with Syria, or Iran, or North Korea."
Numbers Don't
Lie
Indeed, the Federal Reserve's weekly assessment of lending to
businesses dropped throughout April, suggesting that most companies
are holding off on new investments. As Craig Thomas, an economist
at West Chester, Pennsylvania, forecasting organization Economy.com, notes:
"Why would anyone want to invest in equipment [right now]? I
just don't see it."
Meanwhile, housing construction fell in March, suggesting that
American consumers, who are carrying higher levels of personal debt
than they did during the 1991 Gulf War, also are becoming more
cautious. In the past, the government was able to stimulate
spending and growth by slashing interest rates, but the Federal
Reserve has cut rates 12 times since 2000, to its current rate of
1.25 percent.
The arrival of SARS in North America has further heightened
uncertainty. Already, Stephen Roach, chief economist at Morgan
Stanley, has predicted that the world will fall into recession this
year, in part because of SARS. "Right now, SARS is in Toronto,
and we've seen how it's decimated the economy of that
economically powerful city," says Marks. "Tomorrow it
could be in Des Moines."
SARS, the possibility of future conflict and the continuing
threat of terrorism also are complicating shipping logistics,
cutting into companies' profits. For example, over the past six
months, freight rates have risen by more than 30 percent for
companies shipping through the Middle East, as marine insurance
companies raised rates on shippers since the Iraq war by as much as
50 percent. In fact, according to marine insurance companies,
shipping rates have been pushed to their highest level in
years.
More expensive logistics, along with increased tension between
Europe and the United States due to friction over the Iraq war, is
putting a damper on global trade. "The pace of free trade
expansion has slowed drastically," says Scott. "If we
engage in more conflicts in the Middle East, that could further
alienate Europe, which is already hurting economically, and damage
trade." Indeed, unlike in the wake of the 1991 Gulf War, when
Europe and Asia were growing and helped pull the American economy
out of recession, today Europe and Japan are struggling on the
verge of their own recessions.
America's burgeoning deficits--its national deficit and
trade deficit with other nations--also are constraining the
economy. The federal government will run a 2003 deficit of at least
$200 billion, and states also are facing their biggest deficits in
ages. Many states are taking almost laughably drastic measures: In
Missouri, the governor has ordered every third lightbulb unscrewed
in state buildings. At the same time, as the American trade deficit
has grown, the U.S. has become increasingly dependent on foreign
capital to finance growth. If that capital pulls out, it could
shave as much as 10 percent of U.S. growth and drastically weaken
the dollar, Scott says.
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