Postwar bounce? Maybe not

US economy is expected to rebound at end of conflict, but it could take a while.

The US economy is now poised for some kind of postwar bounce. But it's going to be a tempered improvement, not a rip-roaring economic revival.

A rebound will be subdued primarily by the economy's structural problems - excess capacity, high consumer debt, weak markets abroad, and lack of confidence on Wall Street. In fact, economists expect the unemployment rate - one measure of the nation's economic vitality - to remain at 6 percent through the year. "The end of the war [in Iraq] will be a stimulus, but not as big as some expect," says Ken Peng, an economic analyst at Citigroup.

The quick war is undoubtedly positive. The price of oil is dropping. Consumers - no longer glued to their television sets - may return to their spending ways. Companies can begin to focus on ways to gin up production and sales. And investors will turn from images of burning oil wells to earnings' reports.

The recovery should show in the second half of the year, when the nation's gross domestic product is expected to perk up to a 3 to 4 percent annual growth rate, compared with 1.5 percent today. The economy, however, should be doing better. "The first year of a meaningful economic recovery should see 5 to 6 percent annual growth," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis.

This may explain, in part, why the stock market has been relatively calm despite the quick advance of US troops. The Dow Jones Industrial Average is not rising as significantly as it did after the first Gulf War. The lack of cash flooding into the stock market worries Jacob Rouch, president of the Erie, Pa., Regional Chamber and Growth Partnership. The companies in his area, where the unemployment rate is 9 percent, provide components for larger manufacturers. Business executives tell him the dismal stock prices put a lid on capital spending.

But, while CEOs want their stock prices to increase, and get new equipment, Wall Street worries about excess capacity. During the booming 1990s, many companies built new manufacturing facilities, which now run at about 75 percent of capacity. "I ask many customers: What is holding you back from hiring people and spending on new equipment? And, universally, I hear the problem is lack of demand - not the war," says Mr. Sohn.

Corporations, for their part, aren't likely to make any precipitous moves in hiring or expanding production lines. They've been burned before in trying to anticipate upturns in the economy. "I think it will take a couple of months until they pull the trigger, but [then] we'll see the type of growth typical of a recovery," says Thomas J. Duesterberg, president of the Manufacturers Alliance/MAPI, a public policy and business research group.

Yet there is some anecdotal evidence of pent-up demand. In Charleston, S.C., the Charleston Regional Development Alliance has 30 prospective companies, compared to 20 a year ago. "Once this war is resolved positively, I think a number of companies are going to be moving forward," says David Ginn, president of the business development group.

That would help real estate developers like Gary Grunau of Grunau Project Development in Milwaukee, Wis. "The hotel industry is devastated and no one is going ahead with new offices or projects," he says. "I think if we can get this war behind us, we can get this thing moving again."

Even some residential builders feel the war's end could help. Brian Visser, co-owner of Visser Building Company in Boise, Idaho, saw his custom home building business suffer at the end of last year. The end of the war "will make a difference for people who have money set aside but are feeling anxious and are sitting on the edge," he says.

The war's end probably won't help the travel industry - at least not right away. There are still threats of terrorism, and Americans are not sure how they will be greeted overseas.

But small retailers could benefit from the improved mood. At Patti's Petals, a flower shop in Bethlehem, Pa., business came to a "screeching halt" the week the war started, says owner Mike Kohn. Since then, it has rebounded, and now he's getting orders for red, white, and blue bouquets. "People seem more upbeat," he says.

Monitor intern Stacey Vanek Smith contributed to this report.

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