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The economies of war

In 1991, the Persian Gulf War gave a faltering U.S. economy a boost. If we take on Iraq again, the outcome is more difficult to predict.

By KRIS HUNDLEY, Times Staff Writer
© St. Petersburg Times
published March 16, 2003

After the first day of the Persian Gulf War in January 1991, the price of a barrel of oil immediately dropped 33 percent, and the Dow Jones Industrial average rose 5 percent. By the war's end after just six weeks, consumer confidence had shot up 26 points. By March, the nation began to climb out of an eight-month recession.

So what's likely to happen if the looming confrontation with Iraq proves similarly short and successful for the United States?

Economists say the immediate impact would likely be the same as in 1991: lower oil costs, higher stock prices and an improved economy. But they're reluctant to say how long the euphoria would last.

Rather than igniting an immediate economic turnaround, a speedy victory in Iraq would more likely be a first, tentative step toward a gradual recovery.

"After Iraq, I expect bouts of false sentiment and short-term optimism, with consumer confidence and manufacturing orders popping up, then falling back down when people realize things aren't recovering as fast as expected," said Scott Brown, senior economist with Raymond James & Associates of St. Petersburg. "I don't think anybody expects a relapse into recession, but there will be more of the same, with a moderate recovery and job growth picking up in the second half of the year."

Obstacles to a quick turnaround: stubbornly high unemployment, anemic corporate investment and investor wariness, thanks to the burst dot-com bubble and corporate chicanery.

There's also concern that oil prices might not drop as quickly postwar as they did in 1991. No one can predict the potential long-term damage or disruption to Middle Eastern oil supplies, and a continued slowdown in Venezuelan production is likely. With half of all households living paycheck to paycheck, higher gasoline and home heating oil bills are likely to put a damper on consumer spending.

If the war drags on, all bets are off. And if warfare in Iraq is followed by terrorist attacks against targets in the United States, the results may look more like the economic shock waves that followed Sept. 11 than the relief rally of early 1991.

Economists, used to dealing with quantifiable data, talk about uncertainty and fear of terrorism as an "overhang" on the market, but they're reluctant to speculate on how future incidents might disrupt their projections.

"We've been dealing with terrorism alerts for a year and a half," Brown said. "And to some extent it's become like the boy who cried wolf. But as we know in Florida, these alerts don't do anything for tourism."

Domestic terrorism was probably the last thing on most people's minds as they watched Iraqi Scuds and U.S. Patriots explode over Baghdad 12 years ago. After 43 CNN-filled days, the first made-for-TV war reached a cease-fire, and Americans returned to other important issues of the day: the savings and loan debacle, the commercial credit crunch, lackluster tourism, the bankruptcies of airlines like Eastern and PanAm and the demise of longtime retail institutions like Maas Brothers.

Back then, fears of violent retaliation on American soil were the stuff of science fiction. Nightmares were caused not by images of Osama bin Laden, but by that of Anthony Hopkins, whose portrayal of Hannibal Lecter swept the Oscars in 1991.

By the time the first aerial assault on Iraq took place on Jan. 16, 1991, the U.S. economy had been in recession since July. Unemployment was at 6.4 percent, with cuts in manufacturing jobs accounting for much of the loss.

Unlike today, the construction industry was particularly depressed under tight credit conditions. The number of construction jobs in Florida dropped 14 percent in 1990-91, said John C. Robertson, senior economist with the Federal Reserve Bank in Atlanta, compared with a 2 percent increase last year.

"The last time around, it was commercial real estate as well as residential that was contracting," he said. "This time, the commercial side has contracted, but it's being offset to a large extent by continued strength in the residential market."

On the other hand, in the early 1990s the nation wasn't saddled with the overcapacity in its telecom market that has depressed the communications industry today. And despite airline bankruptcies and fare cutting then, the transportation industry hadn't been decimated by the impact of Sept. 11.

Both today and in early 1991, the nation seemed stuck in an economic slowdown that showed few signs of improvement. Mark Vitner, senior economist with Wachovia Corp., said although the '90s recession officially ended in March 1991, the economy continued to struggle for some time.

"Remember that two years later, (the elder George) Bush lost the election because of the economy," he said. "It was growing, but not fast enough."

A similar scenario is possible this time around, Vitner said. Though he is convinced the recession that began in March 2001 ended in February 2002, he knows others, especially the growing ranks of unemployed, might disagree.

"And what good is a recovery if unemployment is rising?" he said. "The economy could stagnate with very little growth."

In the next breath, Vitner concedes his predictions are based on a number of "ifs."

If the war goes well with few casualties. If the administration proves the Iraqis are as bad as it said they were and a lot worse than the French thought they were. If a pro-Western government replaces Saddam Hussein. If the war reduces rather than increases the threat of terrorism.

The future, Vitner admits, is "not going to be all that clear for a while."

-- Kris Hundley can be reached at or (727)892-2996.

Now -- and then

Key indicators showing the U.S. economy as it is today and as it was around the time of the Persian Gulf War. That conflict began on Jan. 16, 1991, and the cease-fire was Feb. 27, 1991.

Interest rate (federal funds rate)

Now: 1.21 percent

Then: Start of Gulf War: 6.77 percent

Cease-fire: 6.31 percent

-- Source: Federal Reserve Board

Dow Jones Industrial Average

Now: 7,859


Start of Gulf War: 2,509

Cease-fire: 2,889

-- Source: New York Stock Exchange

Unemployment rate

Now: 5.8 percent


Start of Gulf War: 6.4 percent

Cease-fire: 6.8 percent

-- Source: Bureau of Labor Statistics

U.S. productivity: (percentage change from previous quarter; nonfarm business)

Now: Up 0.8 percent (4Q02)


Start of Gulf War: Down 2.9 percent (4Q90)

Cease-fire: Up 1.6 percent (1Q91)

-- Source: Bureau of Labor Statistics

Crude oil (price per barrel)

Now: $37.76


Start of Gulf War: $32.25

Cease-fire: $19.03

-- Source: U.S. Department of Energy

Gasoline price at the pump (gallon of regular unleaded, national average)

Now: $1.70


Start of war: $1.34

Cease-fire: $1.05

-- Source: U.S. Department of Energy

Consumer confidence index

Now: 64 (2/25/03)


Start of war: 55.1

Cease-fire: 81.1

(1985 = 100)

-- Source: The Conference Board

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