Quick End to Gulf War Could Lift US Economy
IN addition to fighting Iraq's army in the Persian Gulf, United States forces are combating a deepening recession at home, say economists. If coalition forces succeed in protecting Saudi oil fields and reopening international access to Kuwaiti - even Iraqi oil supplies - dramatically lower oil prices will be guaranteed, oil analysts agree.
Cheaper oil would be the war's most significant impact on the country's economy, easing inflation and precipitating a drop in interest rates. Federal Reserve Board Chairman Alan Greenspan acknowledged as much in the beginning days of the war.
``Oil, the price of oil, is an economic weapon as powerful as any missile,'' asserts Allen Sinai, chief economist of the Boston Company, an investment banking firm.
(A US military spokesman said Tuesday that aerial photographs indicate Iraq is damaging or destroying some Kuwaiti oil facilities. Wells and storage tanks apparently have been blown up, he said.)
``Kuwaiti and Iraqi oil were replaced already [by Saudi, Mexican, and other exporters' increases],'' notes Richard Belous, senior economist with the National Planning Association. ``If we pass through the conflict and Kuwait and Iraq want to pump, prices will be forced down, because we'll have a glut on our hands. That will dampen inflation.''
But a short, decisive victory for US and allied forces and a steady energy supply cannot reverse the US economic decline, says economist Robert Hormats, vice chairman of Goldman Sachs International. Before the Gulf crisis, the US economy was faltering, he says.
``What the Iraq crisis did was push oil prices up, and consumer confidence down,'' Mr. Hormats says. ``This caused manufacturers to cut back on production in the event of weakening demand.'' Leaner business inventories, if the result of reduced production, mean layoffs, exacerbating unemployment. ``A short war improves consumer confidence; it makes people more optimistic about the future. When oil prices come down, more money is in the hands of consumers, because they're spending less on energy needs. Of course, inflation slows and financing costs are cheaper,'' Hormats says.
He cautions against banking on US exports as a source of strength for the economy. While the bill for oil imports may drop, the weak dollar makes US imports even more expensive and does little for US exporters. American success depends on growth abroad, Hormats says, noting that Canada, the major US trading partner, is in a serious recession.
Britain and the rest of the European continent, excluding Germany, are also in recession, he says.
With lower oil prices, says Brookings Institution economist Charles Schultze, ``the Federal Reserve will be a good bit freer'' to ease the money supply and stimulate domestic spending.
Will a resurgence of defense spending in the 1990s spur US industry? Will the Pentagon's private contractors line up on Capitol Hill claiming the need for more defense orders based on the newly proven success of their high-tech weapons?
``The replacement value of all US military hardware is $4 trillion,'' says Paul Nisbet, an aerospace analyst with Prudential Bache. ``We're not going to revive the US economy through defense spending, but we'll almost certainly see some reprocurement.'' He says US defense spending will reach at least $325 billion in 1991, up from $290 billion last year.
Raytheon, maker of the Patriot missile, expects many more orders. Only six months ago, Raytheon and other defense firms successfully converted part of their defense manufacturing into non-military production, according to a senior Raytheon official.
The current conflict, involving a coalition of international partners with a worldwide energy source at stake, may herald heightened defense procurement in the 1990s.
Mr. Schultze discounts the need for Congress to increase defense spending and says increased defense orders will have a marginal impact on the nation's gross national product.
``We can expend an enormous amount of weapons without the Defense Department having to resupply.... What you shouldn't expect is a major surge of defense orders,'' he says.
All businesses that have put off capital investments in modernization and equipment due to the slow economy ``may get a boost from a strong US victory in the Gulf, with an expectation that we can emerge from recession,'' says Mr. Belous.
If the war becomes protracted, jeopardizing Gulf oil sources, he says, the US economy can expect higher energy prices, and a further fall off in the service sector and retailing. A deeper recession and sharp increases in unemployment will follow.