So Far, Postwar Boom Is A Bust
The hope had been that a fast and successful war in Iraq would set off an economic boom that would quickly translate into falling unemployment for American households and fatter order books for U.S. businesses. But so far, the boom has been a bust.
U.S. tanks rolled into Baghdad in the second week of April, but the military victory did not stem a wave of new job layoffs in the United States.
With April's job cuts, total layoffs over the past three months topped a half-million workers, a performance usually seen only during the depths of a recession.
The picture looked even bleaker for the nation's hard-hit factories, which suffered another 95,000 lost jobs last month, the 33rd straight month of declines that have eliminated 2.2 million manufacturing jobs.
Other statistics have shown weakness as well, with a key gauge of manufacturing activity plunging further into recession territory in April and automakers reporting sales declines despite attractive incentive deals.
"Just to say that everything would be hunky-dory because the war was over would not have been a good forecast," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
To be sure, not all the economic news since the war has been negative. Consumer confidence, which had fallen for four straight months, rebounded in April as Americans grew less fearful about what a U.S. invasion of Iraq would mean in terms of terrorist attacks and oil prices.
But the new worry is that the sharp increases in unemployment — the rate jumped to 6 percent in April — could quickly dash confidence and cause Americans to curtail spending, the one major force that has been working to lift the economy out of the 2001 recession.
The problem is that the end of the war, while removing fears of various worst-case scenarios, left the country facing many of the same problems that have made the current recovery so lackluster.
"After the war, we have reverted to the economy we had last year before the war," said David Wyss, chief economist at Standard & Poor's in New York. "We are still suffering from overcapacity problems in industry and consumers are in debt up to their eyeballs."
American businesses have been the big no-show so far in the recovery. Capital spending has yet to mount a sustained rebound, with corporations reluctant to make new investments when factories are operating at low levels.
Strong home sales and solid consumer spending have taken up the slack, but analysts believe businesses must soon step in as consumers' pent-up demand wanes. They note that even with the return of attractive incentives in dealer showrooms, auto sales fell in April compared with a year ago.
President Bush, eager to end the current jobless recovery and bolster growth ahead of next year's presidential election, has been pushing Congress to pass another round of tax cuts of at least $550 billion, the level in the House bill. The Senate approved $350 billion.
Economists believe the rising jobless rate will spur Congress to pass a scaled-down version of Mr. Bush's original $726 billion tax cut package — probably around $400 billion in reductions over 10 years.
The prediction comes even though Federal Reserve Chairman Alan Greenspan told Congress last week that any tax cuts should be offset in light of rising budget deficits ahead of a wave of baby boomer retirements in the next decade.
A large deficit can put upward pressure on interest rates, which would reduce any jump-start provided by any extra money consumers spend because of the tax cut.
Greenspan, in his first war comments on the economy after the Iraq war, said the economy was poised to grow at a "noticeably better pace." He added, however, that "the timing and the extent of that improvement remains uncertain."
Private economists generally agree with that assessment, although some have marked down their forecasts for coming months based on disappointing results so far.
Merrill Lynch economist David Rosenberg said he believed the economy would continue growing at a lackluster rate of 1.8 percent in the current April-June quarter, little changed from the first-quarter performance. He said he was looking for a rebound to growth of 3 percent in the July-September period, and then around 2.5 percent in the final three months of the year.
Rosenberg said he had trimmed his second-half forecast by one-half percentage point to reflect the continued weak economic reports.
"We share Chairman Greenspan's view that while economic conditions are bound to improve from their near-stagnant levels, both the timing and the vigor of the expansion remain in doubt," he said.