In the second week of Operation Iraqi Freedom, Wall Street is digesting concerns that the war could go on longer than expected. But what does a longer war mean for investors, stock markets and the economy?
THE REASON WHY economists worry about weak growth is because the economy becomes increasingly vulnerable to shocks, shocks like war, oil price hikes or plunging consumer confidence. And the longer these problems weigh on the economy, the more chance there is of recession.
“A longer war will make the economy sluggish, and because we are growing at a fairly slow pace, when you slow down further the danger is you can turn back to recession,” says Richard Rippe of Prudential Financial. “I don’t think that’s the best guess, but certainly a longer war with much more damage and much more doubt can produce that kind of outcome.”
We know the economy is just barely growing. The government confirmed Thursday that the economy grew just 1.4 percent in the fourth quarter of 2002 — expectations for the first quarter aren’t much greater.
Some good news came today in the form of a decline in weekly jobless claims, down 25,000 to 402,000. But the bad news is that the overall level remains stuck above 400,000, which shows that the job market is still very weak.
And that’s one of the likely victims of a longer war. Businesses have been reluctant to hire because of uncertainty, a problem that is likely to linger along with the war.
The uncertainty will also make business postpone important decisions, which will continue to depress capital spending.
“You put off capital spending at the hotels where you do some improvements and continue to maintain the assets which we have,” says Thomas Corcoran, FelCor Lodging Trust CEO. “But what you do is you put off what I call discretionary projects that would drive incremental value. All of us are wanting to be certain before we invest capital that we … understand the complete effects of the war on the economy.”
A longer war also could mean that high oil prices will weigh longer on the economy. Oil prices began to decline with the start of the war, but they were up over $1 a barrel Thursday to $30.
All of that will add up to a more cautious consumer, spending more on energy, and unwilling or unable to spend on more discretionary items.
Arguing today for President Bush’s request for $75 billion to finance the war, Defense Secretary Donald Rumsfeld insisted America would be victorious and the cost is justified.
“We cannot know how long the effort in Iraq is going to last and we certainly can’t tell what it’s going to cost,” Rumsfeld said. “But what I do know is that whatever it ends up costing, it will be small compared to the cost in lives and treasure in another attack like the one we experienced on Sept. 11.”
Several economists say that it might actually be helpful for markets and consumers to lower their expectations for the war, suggesting the real mistake may have been the optimism at the outset. That makes the one silver-lining this — surprises are likely to be on the upside.