TIME: Almanac 1993/TIME Almanac 1993.iso/time/031191/0311200.000

Text File | 1992-08-28 | 8.5 KB | 179 lines

                                                                                BUSINESS, Page 67

Victory's Dividend


Don't expect miracles, but victory in the gulf should boost the
economy

By RICHARD BEHAR -- Reported by Bernard Baumohl/New York, Gisela
Bolte/Washington and William McWhirter/Chicago


    When Johnny comes marching home, will the rest of us
celebrate by tramping off to the mall or auto showroom?
Business-people and investors across America are pondering that
question, trying to balance widespread forecasts of at least
one more recessionary quarter against the euphoria of a swift
battlefield victory. Does peace mean prosperity? If the gulf
war didn't start this recession, what role will Kuwait's
liberation play in ending it?

    War, not peace, typically stimulates huge demand for goods
and services. That didn't happen this time, in part because
this war was fought mostly with stockpiled off-the-shelf
weapons and munitions. Now a growing number of economists and
businesspeople are predicting, suggesting, hoping -- praying
-- that the cease-fire will trigger an improvement in the
economy by boosting consumer confidence and spending. "Peace
is a jump-starter," says John Tuccillo, chief economist of the
National Association of Realtors. "This is the catalyst that
can get the thing cooking. It's not the whole story, but it is
a spark, and that's important because this is an economy that
needs a spark."

    No experts are foolish enough to predict that peace will
obliterate America's severe economic woes -- its mountains of
debt, its banking crisis, its depressed real estate market. But
a consensus holds that peace and national pride will at least
erase the preoccupation with war and TV bulletins that has
turned the slush of a winter's recession into a frozen economic
tundra. Among the areas showing signs of a peace-prompted thaw:


    Consumer Confidence. It plunged after the gulf crisis began
and in January finally dragged consumer spending down with it.
That's important because such expenditures account for
two-thirds of America's economy -- so it's heartening that
confidence suddenly reversed course in February, posting a
small improvement. For the first time in five months, the
closely watched monthly consumer confidence index of the
Conference Board, a business research group, rose 2.6 points,
to 57.7. That's still way below last July's 101.7, but it's
a start. It also fails to reflect consumer reaction to the
cease-fire, which was announced after the survey was completed.
Says economist Paul Erdman: "The American nation refound its
confidence on the Persian Gulf battlefield. That confidence is
seeping down into the national psyche and could help bring on
an economic renewal. The war showed we don't have to play
second fiddle to anybody, that we don't need the Germans and
the Japanese to help us accomplish something."

    Wall Street. Victory had been discounted for several weeks
by the stock market, where a raging bull can help trigger a
speedy recovery. The Dow Jones industrial average closed this
week at 2909.1, up 6.3% in the past four weeks and up 544
points, or 23%, since its October low. Daily trading volume
since January has averaged 195 million shares, 19% higher than
a year ago. If this keeps up, the securities industry will post
its most profitable quarter in nearly a year. Assets of mutual
funds -- including risky small-company and junk-bond funds --
grew a record $59 billion in January, and the frenetic pace
continued in February. "This is the first popular war since
World War II," explains Bill LeFevre, senior stock-market
strategist for Tucker Anthony. "You could very well see the
consumer celebrate by buying that postponed car, TV or
refrigerator. This will go a long way toward turning the
recession into recovery." Stocks have accurately forecast seven
of the eight recoveries since 1949, while the biggest bull
market in history started in the 1982 recession.

    Oil. Say goodbye to fears of $50-per-bbl. oil. World oil
supplies are greater than they were a year ago despite the lack
of production from Iraq and Kuwait. With the war over, most
experts foresee a temporary plunge to as low as $15, which can
only help consumers. Even if OPEC reins in production and
maintains a price of $21 per bbl. or so, as it apparently would
like, most consumers can live with that, and business had been
forecasting such a price for 1991 before Iraq's invasion of
Kuwait last summer. Gasoline prices are lower than before the
invasion, if the effect of a new nickel-per-gal. federal tax is
discounted. Cheaper jet fuel is welcome news for the nation's
tortured airline industry.

    Housing. Tuccillo of the National Association of Realtors
says the biggest impact of peace on the housing market may be
regional. Most of the American troops in the gulf were pulled
out of the southeastern U.S., he says, where merchants have
suffered and housing markets have stagnated as a result. Says
he: "Maybe the biggest bump we'll see in the housing market
will be in that section of the country, when we repatriate the
troops and they get on with the lives they've put on hold for
six to eight months." Thanks to falling interest rates and
softer prices, the housing industry's Home Affordability Index
is at a 14-year high.

    Trade and Manufacturing. With exports growing impressively,
the U.S. merchandise trade deficit shrank to $101 billion last
year, the smallest imbalance since 1983. Resolution of the gulf
conflict may have set the stage for further improvement. Kuwait
will apparently be buying billions of dollars' worth of U.S.
goods, giving the trade balance a strong, if one-shot, boost.

    Cars. The nation's Big Three automakers plan to lay off
29,000 workers this week as they close all or parts of 16
assembly plants. Blessedly, traffic through dealer showrooms
has begun to show signs of revival in recent weeks. "It's up
30% to 40%," beams Mark Hutchins, general sales manager for
Ford's Lincoln-Mercury Division. "We're ready for things to
turn around, and we think they're turning." An unexpected
bonanza: Kuwait may need to replace 100,000 cars and trucks in
1991.

    Travel. With the cease-fire, tourists have at last begun
making reservations rather than having them. The Thomas Cook
travel agency recorded a marked increase in new bookings last
week. Confidence should rise higher as carriers resume flights
they suspended when the crisis escalated. Air France and
Lufthansa have announced they are flying to Tel-Aviv again. On
Madison Avenue, advertising executives are optimistic that
improvement in the travel sector could spark a slow recovery
in their industry as well.

    Even without this swift victory, the U.S. economy was angled
upward. A survey by the National Association of Business
Economists conducted last month shows that 73% of the
professional business forecasters share President Bush's
expectation that the recession will be shorter and less severe
than the typical one and should be over by midyear. Some 25%
are pessimistic and point to the country's undeniable
fundamental ailments -- most notably debt defaults and the bank
credit crunch -- as reasons why it will be hard to recover from
the downturn. And then there's the war's cost, which White
House Budget Director Richard Darman estimates at $40 billion,
not counting ground combat. He says the U.S. has offsetting
commitments of $53.5 billion from allies, though many in
Washington doubt those countries will pay in full.

    Against all that, a surge of pride might not be strong
enough to move the economy far. "Most Americans feel very good
about the war and the fact that the U.S. did something very
important," says Leo Melamed, chairman emeritus of the Chicago
Mercantile Exchange, "but I don't believe they are going to use
those feelings to go out and buy a Cadillac or a washing
machine."

    Even if consumers don't celebrate the troops' safe return
with an assault on local retailers, some analysts see a
longer-lasting, if still unquantifiable, benefit from this war.
"We built and fought well with some of the most sophisticated
instruments ever designed," points out Walter Scott, a
professor of management at Northwestern's Kellogg Graduate
School of Management. "The biggest dividend at home may be
instilling that same kind of aggressiveness into our own
business competitiveness. People may be willing to roll up their
sleeves and think Japan isn't such an indomitable rival after
all."