We’ve washed out the prewar spike in oil prices, which drove 1990’s inflation rate to a worrisome 6.1 percent. We’re finished, one hopes, with the stunning collapse in consumer confidence that choked off business at year-end. If the war is short–say, a few weeks–the economy should nurture a comforting run of lower inflation, lower interest rates, rising confidence and somewhat stronger business. Optimists think the rebound might be felt as early as spring and no later than summer. “Worst-case scenarios don’t make sense anymore,” says economist David Rolley of the forecasting firm DRI/McGraw-Hill in Lexington, Mass.
Still, the markets are jumpy–all the more so, as television carries the moment-by-moment alarms of war into every home. Should doubts arise as to the length or severity of the conflict–in particular, if the United States gets bogged down in a bloody ground war–confidence might slip again, delaying the recession’s end.
Americans are inclined to believe that wars boost an economy and create jobs. But that’s not the case. The true source of a wartime boom is government spending and money growth which, in the present instance, weren’t supplied. The Iraqi threat was actually a job destroyer in the early months, contributing, as it did, to the drop in confidence and consumer spending. If the war doesn’t drag out very long, defense production won’t gear up–so you won’t find extra jobs there, either. War spending did rise an extra $2.7 billion last year and perhaps $12 billion to $15 billion so far this year, according to congressional sources. But most of that money is being consumed by daily operations. Barry Blechman, president of Defense Forecasts in Washington, D.C., says that the procurement contracts are chiefly for munitions and soft goods: desert camouflage, netting, freeze-dried foods, antidotes to chemical weapons, and the like. “The major defense contractors are laying off workers and will continue to do so,” he says.
Where the economy will make gains is on the beleaguered civilian side. It’s hard to think of an industry that can’t be helped by lower interest rates and oil prices. Economist Roger Bird, a vice president of the forecasting firm, the WEFA Group, is especially optimistic about the manufacturing firms that produce for export (heavily concentrated in the Midwest). Europe has been a heavy buyer of American-made machine tools, business electronics and other capital goods. Safer, cheaper oil supplies will support Europe’s growth and its appetite for shopping in the United States.
Oil prices may jump around but John Lichtblau, chairman of the Petroleum Industry Research Foundation, thinks they cannot rise by much. The entire world stocked up on crude, for fear that the Saudi fields would close. When they didn’t, the oversupply spilled into the market, driving prices–in just one day–from $32 a barrel down to $21. At that price, gasoline at the pump should fall by 20 cents a gallon, says Ben Brockwell, editor of the Oil Price Information Service. Heating oil could drop by 10 cents a gallon almost immediately and 45 cents by next September. At the end of last week, crude closed at $19.25 a barrel, compared to $21.54 on Aug. 1, the day before Saddam Hussein overran Kuwait.
Slower inflation and easier money should lower interest rates even further, in the opinion of Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles. He puts the prime business lending rate at 8.5 percent by spring, down from 9.5 percent today. If he’s right, the debt load will be greatly lightened for businesses and any individuals whose loan-interest rates are pegged to the prime. Such a broad drop in rates should also bring out strong demand for home-mortgage money.
Jordan’s interest-rate forecast falls on the optimistic side. Still, most economists believe that, barring a long war, the prospect of much higher rates is remote. If you’re living on income from your savings, consider switching out of floating-rate money-market mutual funds or bank accounts and into intermediate-term (five- to 10-year) Treasuries and CDs. The returns from short-term accounts should shrink.
As for U.S. stocks, many analysts doubt that a new bull market has begun, despite the explosive 4.6 percent rally on the war’s first day. At last Friday’s close, the Dow Jones industrial average topped 2646, for the best one-week performance ever. Doubters point to the lingering recession as reason to think that stocks may ultimately find their footing at lower prices. But who knows? Steady buyers of mutual funds should stick with their programs. Heiko Thieme, consultant to the Deutsche Bank Capital Corp. in New York, expects foreign investors to plunge into U.S. securities in 1991 because, he says, in terms of their home currencies the markets here are both cheap and undervalued.
Amidst all the speculation last week, I heard no “cautious middle.” Observers are either expecting the best or predicting the worst–the latter defined as some form of financial collapse. The bears concede the good effects of lancing the boil in the Persian Gulf but expect the recession to resume. Gold is no haven. “The disinflationary trend is bad for all tangible assets–gold, real estate, silver and other commodities,” says August Arace, who runs the Freedom Gold & Government Fund. Treasuries remain the worry bead of choice.
