Economic smoke may not clear for months

iVillage Member
Registered: 03-23-2003
Economic smoke may not clear for months
Mon, 03-31-2003 - 5:49pm
Just thought this was an interesting article. I try and keep on top of all the economic 'indicators', but it really is confusing with two 'camps' presenting different interpretations of the data...{headache! ;-) }

The stock market looks long on emotion and short on conviction. It’s hard to find the evidence of improving economic fundamentals that would support higher stock prices.

By Jim Jubak

Investors trying to figure out what happens to stock prices after the war in Iraq have two alternatives.

There’s the “things are really OK” view. The war has depressed corporate and consumer spending so that the economy looks weaker than it is -- and the lifting of the uncertainties of war will show the economy growing at a solid pace.

And the “war or no war, the economy’s in trouble” alternative. In this view, corporate capital spending still isn’t ready to pick up and the consumer is showing signs of pulling back on spending. When the dust of war clears, the economy’s problems will remain.

It should be simple to pick the correct alternative, right? Just look at the data and decide. But because of the war, that’s not possible. The data currently show a weakening economy -- but they don’t tell investors whether that weakness is a result of the war or of an endemic slackening in the underlying economy.

The economy is limping, but why?

Certainly it’s easy to find signs of economic weakness. Take a look at the housing numbers, for example. Feburary sales of existing homes fell to an annual rate of 5.84 million, down about 4% from January’s 6.1 million. And new-home building dropped 11% in February, according to the Commerce Department.

Or how about consumer confidence? The Conference Board’s index fell to 62.5 in mid-March from 64.8 in February. That was the fourth consecutive monthly drop. The University of Michigan’s index shows the same pattern, falling to 75 in mid-March from just below 80 at the end of February.

But those numbers aren’t bad enough to demonstrate that a relentless downward trend has taken hold. Weather was terrible in February, and that accounts for at least part of the drop in home sales. And even with the February drop, sales are running about 1% ahead of last year’s pace and at the fourth-highest annual rate since 1968.

And these numbers are themselves highly volatile. Consumer confidence surged from similarly low levels at the end of the first Gulf War in 1991 -- and then dropped back when worries about jobs set in.

Even Greenspan seems in the dark

Looking at more data points doesn’t resolve the confusion, either. At its March 18 meeting, the Federal Reserve, which sees more economic data than anyone else, decided to keep the Fed funds rate steady at 1.25%, a 43-year low.

Some on Wall Street believe that’s a vote by Alan Greenspan and company for Alternative 1, and that the Federal Reserve believes that the end of the war will produce a solid economic recovery.

It’s just as reasonable, however, to argue that the Federal Reserve simply decided to keep its options open in this environment of uncertainty.

Will oil prices continue the tumble that brought them down by $10 a barrel -- almost 30% -- in the nine days after the war started? Will Congress passes a budget that stimulates the economy without scaring the bond market into ratcheting interest rates higher? Will capital-spending budgets begin to inch higher as the year goes on?

If the answer to all of these is yes, then doing nothing will have been all that was necessary to set growth on a solid path.

But if a crisis in Nigeria or Venezeula or the Mideast should deliver an energy-price shock to the economy, or if interest rates should start to move up, or if companies continue to cut spending and to lay off workers, then the Federal Reserve still has a full 1.25 percentage points to use as a tool.

It’s unlikely that anyone will have enough data to know how strong the economy is until early summer or later.

And until then, it will be difficult for many investors to find the conviction to re-enter the stock market.

iVillage Member
Registered: 03-18-2000
Tue, 04-01-2003 - 7:33am
JMO but I think the lack of confidence has more to do with Wall Street & corporate scandals than the war. Investors have lost loads of $$$ & some are even suing investment companies for giving bad advice & lying.



iVillage Member
Registered: 03-23-2003
Tue, 04-01-2003 - 9:05am
I agree that's the main influence. Historically, war hasn't been good for the economy either. So, add that to the corporate scandals... It's just I keep reading such diametrically opposed opinions on the 'health' of our economy that I'm beginning to not believe ANYONE any more! LOL!