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War limbo keeps economy on hold

A sharp slowing in the fourth quarter coincides with stock-market jitters over Iraq.

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Call it the Baghdad factor.

The US economy - the largest on the globe - is now haunted by the specter of war. Until the future of one of the most important areas of the world is decided, the American economy appears to be in a period of anxious limbo. Businesses are not building new factories, consumers are rethinking their vacations, the value of the dollar is shrinking - and the US stock market is back to a familiar slide.

This has many economists lowering their forecasts for growth this year. And, while most of them still think the economy will show growth over the year, a significant minority believe uncertainty about war could knock it back into recession.

If the US economy does falter, it could have vast implications for international growth - which is already weak. And the prospect of lower growth here could spur Congress to pass a stimulus package sooner than planned.

Thursday, economists will get some idea of how much momentum the economy has lost when the Commerce Department releases its first estimate of GDP in the fourth quarter. Early estimates suggest a gain of about 0.5 to 1 percent, making it the weakest quarter of the year.

Tuesday, the government reported that orders for big-ticket items - durable goods, such as automobiles and computers - rose only 0.2 percent in December. "Wednesday's durable-goods report is further evidence that the manufacturing sector is flat in the water," says Thomas Duesterberg, president of the Manufacturers Alliance/MAPI, a Washington business-research group.

The Federal Reserve will discuss the economy's strengths and vulnerabilities, after meetings on interest-rate policy Tuesday and Wednesday. Most analysts expect it to leave short-term rates alone.


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