- The Washington Times - Friday, September 20, 2002

The prospect of war with Iraq is weighing on the stock market, where investors fear that high oil prices and a prolonged and costly conflict would hurt the fledgling economic recovery.

Worries about Iraq and a softening economy have contributed to an 1,100-point loss in the Dow Jones Industrial Average since Aug. 22, while expectations of military action against Iraq have helped send oil prices up by 48 percent in recent months.

Yesterday, the price of a barrel of oil hovered just below $30, reflecting a war "premium" of between $4 and $6 a barrel, analysts said. Rising oil prices caused sharp increases in consumer energy costs for a second straight month, the Labor Department reported.

While the market reaction thus far has been negative, no one really is certain what the economic impact of another Persian Gulf war would be.

Bush officials say a war would have little impact on the economy, although they concede it could push up the budget deficit by another $100 billion to $200 billion. In any case, they say the effect on the economy should not be a consideration in deciding whether to go to war.

The 1991 war with Iraq helped to push an already-weak economy into recession, however, and most economists say another conflict could do the same.

A few analysts hold out hope that a quick win by American forces would actually boost stocks and the economy, but nearly all agree that the economic risks are considerable if that doesn't happen.

"The economy is very vulnerable to any sort of shocks right now" as consumer spending for months has been the only major source of growth and strength, said Jay Bryson, economist at Wachovia Securities.

With the economy already listing, he said, "it only takes one more torpedo to bring the ship down."

A debilitating shock could occur if oil prices spike to $40 a barrel from their current level of about $30 not an unlikely scenario considering it happened in the Persian Gulf war, he said. Oil prices could go even higher if the conflict is prolonged and widens into a war involving other nations in the Middle East, analysts say.

The sticker shock from high oil prices, combined with news of American casualties, would pummel consumer confidence and pinch purchasing power, both of which already are suffering somewhat from higher oil prices and rumors of war.

If the shock occurred during the height of the home-heating season this winter, Mr. Bryson said, "you could kiss Christmas sales goodbye."

Businesses right now would be hurt even more than consumers by high oil prices, as competitive pressures have left them with little wherewithal to pass on such increased costs.

An oil shock likely would add to record business bankruptcies in such industries as airlines and energy-intensive manufacturing, leading to more layoffs in a classic recessionary spiral, Mr. Bryson said.

One helpful offset for businesses and consumers is that interest rates most likely would plunge in the event of war as investors dive into safe-haven Treasury bonds. That would enable those who still have jobs to refinance and reduce their debts, he said.

Edward Yardeni, chief investment strategist, said he hopes any move by the United States against Iraq will quickly succeed and provide a boost to stocks and the economy.

But until a victory is within sight, worries about the war will continue to weigh on the market and cloud the economic outlook, he said, dashing hopes that stocks would stage a major rally by the end of the year.

Because war now appears "more likely, though not inevitable," Mr. Yardeni said he has pushed back by several months his optimistic targets for a rise in the major stock indexes.

Overall, Mr. Yardeni remains optimistic and he expects the economy to keep growing in the event of war. He notes that consumers and businesses already have withstood a sizable increase in oil prices this year, and yet the economy continues to grow at around a 3 percent annual rate.

"With or without a war, a successful outcome in Iraq for the United States could have consequences as positive and bullish as our victory over the Soviet Union in the Cold War," Mr. Yardeni said.

Economies and markets generally flourish when democracy prevails, he said.

President Bush has said his goal is to replace Iraqi President Saddam Hussein with a democratic government.

Federal Reserve Chairman Alan Greenspan also does not expect any invasion of Iraq to thwart growth, as long as the conflict is short and successful. But he said in testimony last week that a prolonged conflict would pose "difficulties" for the economy.

One big difference with 1991 is that a war with Iraq would hardly come as a surprise, and this time around the United States would control the timing, analysts say.

The talk of war is giving the markets and consumers time to gradually adjust to higher oil prices, and the U.S. government could help mitigate the impact of any oil shock by dipping into its Strategic Petroleum Reserve.

While government officials see little cause for concern, some Wall Street economists are warning that a U.S. attack in the Middle East almost certainly would plunge the world into recession.

"The Iraq wild card and the related possibility of an oil shock however brief shouldn't be taken lightly," said Morgan Stanley chief economist Stephen Roach. He contends that conditions now are even more conducive to recession than they were in 1990.

"Today's global economy is more trade-intensive and more U.S.-centric," he said, referring to the important role the United States plays in fostering world growth by importing vast quantities of goods.

"Should America suffer a recessionary relapse, the rest of the world is lacking the cyclical immunities that would prevent renewed global recession," he said.


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