Generally speaking, wars mess things up–if not right away, then eventually. The Vietnam War boom, for example, led straight to inflation and recession. Gulf War II and its impact on confidence may cut U.S. growth this year by 1 to 1.5 percent and world growth by 0.5 percent. That’s a lot of jobs lost.
For now, stocks are chasing every wiggle in the war news. On good days, almost everything rises–the dogs and the healthy stocks alike. On bad days, they all slump. Don’t chase war rallies. This market is strictly for professional traders with itchy fingers and confident five-minute opinions.
The tough question is what might happen after the war, however “the end” is defined. The scenario sketched in Washington calls for a business rebound with stocks roaring up. But we’re still on the dark side of the bubble, so further weaknesses may show up. Corporate-earnings estimates are dropping like JDAMs over Baghdad. We may even be back in a recession, says Allen Sinai, chief global economist at Primark Decision Economics. Maybe we never left.
The key to the future is employment. Annual real incomes are up about 3 percent. But fewer people are cashing those payroll checks. The United States lost almost half a million jobs in February and March. In fact, some 2.6 million private-sector jobs have evaporated since the start of 2001. Terrorism, war and now the deadly respiratory disease SARS choked the airline, hotel and tourist industries. High oil costs dragged down trucking. Thousands of stockbrokers are on the street. State and local government employees will be hammered next, as the states struggle to balance their budgets. Some 25 percent of the unemployed have been laid off for more than 27 weeks, says economist Irwin Kellner of Hofstra University. Except for a brief peak in 1992, that’s the highest since 1984. When longtime employees are forced to look for new jobs, they rarely get anywhere near their former pay.
Job worries have stalled consumer spending. Auto sales fell in March, compared with a year ago. Sales of other goods are rising, but only modestly. The National Retail Federation just slashed its sales forecast for 2003 by one third. Manufacturing is contracting again–a sector that’s clearly in recession (except for military goods and defense technology). New-home sales fell in January and February. Still, they’re running at a pretty high level. January’s median home price plunged–the sharpest year-to-year drop since just after the 1991 recession, says economist Lacy Hunt of Hoisington Investment Management in Austin, Texas. Prices are shakiest for high-cost homes in areas with weak job markets, such as San Francisco, Denver, Boston and Sacramento, says the data-collector Fiserv.
Home refinancing dropped a bit last month but is still at near-record levels. Economist Mark Zandi of economy.com thinks you should lock in low mortgage rates and use the money you save (or take out of your home) to pay off credit cards. Folks also spend this money, which helps keep retail alive. “But I don’t see a recovery based on an indefinite rise in debt,” says economist Ron Blackwell of the AFL-CIO.
The stock market looks ahead, of course. If growth improves in the second half, stocks should be rising now. But if business stays sluggish until 2004, stocks may drop, after the post-Iraq party, and not pick up for many months. Gail Dudack of Dudack Research calls dividend-paying stocks a good strategy for people planning to retire in about 20 years. Look for companies that have paid dividends consistently.
Finally, there’s oil. Prices for crude have dropped to $29 a barrel, from the record $39.99 in February. But gasoline is still expensive, ranging from $1.50 to $2 a gallon. Pump prices will drop, but maybe not to the $1.10 we were paying early last year. Oil analyst Charles Maxwell, of Weeden & Co., thinks we’re drawing toward the end of the era of surplus oil. In the not-too-distant future, he says, we’ll pay higher prices for more limited supplies. Good bets for the future will be companies and technologies that adapt to energy conservation.
One product getting attention is the “hybrid car,” which drives on a combination of gasoline and electricity. No, you don’t have to plug them in. The combo gets 45 to 68 miles per gallon, says Ron Cogan of Green Car Journal. The hybrid Toyota Prius got Harrison Ford and Cameron Diaz to the Oscars. There’s a Honda Civic Hybrid and a Honda Insight. Ford, Toyota and Honda are working on hybrid SUVs.
When the shortages show up, we’ll be even more in the hands of the Middle East, Maxwell says. That’s why I think the Iraqi war is mainly a bid for keeping large oil reserves in friendly hands. In her new book, “Leap of Faith,” Jordan’s Queen Noor recalls the first President Bush telling the king, about Saddam, “I will not allow this little dictator to control 25 percent of the civilized world’s oil.” From Poppy to son.
