For economy, road now looks steeper

Oil prices are down since war, but job outlook remains bad. President steps up bid to sell tax cut to spur growth.

An already slack US economy appears to be getting weaker, prodding efforts in Washington to give it a push.

The goal: to develop enough momentum that business feels confident hiring new workers - and lowering the unemployment rate, which just hit 6 percent in April.

President Bush plans more trips - he's scheduled in Little Rock, Ark., Monday - to talk about the economy and lobby Congress to pass a $550 billion tax cut. Congress is also turning to the economy this week, with the House voting on a tax bill as early as Friday. Tuesday the Federal Reserve meets to talk interest-rate policy.

All the activity is coming at a critical time for the economy. Despite a US military victory in Iraq, which lifted a burden of uncertainty, economic indicators have dropped to levels that sometimes presage some form of economic contraction. The manufacturing sector is already in a recession and last month had its largest job loss since January of 1992 - a recession year.

"It's pretty disappointing, the momentum is not in the right direction," says Bob Brusca, chief economist at Native American Securities in New York.

Despite this slowing, Federal Reserve watchers don't expect Fed Chairman Alan Greenspan to press for lower interest rates.

"He's probably going to want to wait for more economic data from the postwar period - June and July," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

In testimony before Congress this week, Mr. Greenspan said he expects to see improvement in the year's second half now that some of the geopolitical uncertainties have been resolved.

Wall Street, for its part, decided the Fed chairman might just be right, and the stock market responded with a rally.

"The premise is that if the economy does respond and growth accelerates, corporate earnings will improve dramatically," says Bill Sullivan, an economist at Morgan Stanley Dean Witter in New York.

'A gradual grinding higher'

Even if Mr. Greenspan is correct, don't look for a sharp upturn, says Jay Bryson, an economist at Wachovia Securities in Charlotte, N.C. "It will be a gradual grind higher," he says. "What holds the key to the future is the US consumer."

Last week, the Conference Board reported its April consumer confidence index rebounded sharply, helped in large part by the conclusion of major hostilities in Iraq. And in the coming weeks, consumers' incomes will be bolstered some by lower prices at the gas pump. Since the war ended, the price of oil is down about $12 per barrel. The price of gasoline on the futures markets is down as well.

But that improvement in sentiment has yet to translate into actual sales. Last week, automakers reported April sales were down about 6 percent, despite the return of zero-percent financing. "Consumers are tapped out. There is little pent-up demand," says Mr. Sohn.

Moreover, the sentiment survey was taken before the April unemployment numbers came out. "It must affect those who have jobs," says Mr. Sullivan. "They are wondering, 'Am I next?'"

Now, President Bush is trying to prevent the economy from repeating what happened when his father was president: a nose dive after the Gulf War of 1991 ended.

Key: business spending

What eventually got the jobs machine humming again was a big surge in capital spending as CEOs gave the green light for spending on high-tech machinery and computers. The telecom business swelled as entrepreneurs started laying cable and dotcom businesses made instant millionaires out of college grads.

Economists are hoping that business responds again this time. One important factor: Inventories are so lean that any pickup in demand will translate quickly into higher production. In fact, factory orders for March were up 13 percent.

A tax incentive

If business improves, says Mr. Bryson, business may start to think about using an investment tax that expires in 2004. "If they don't use it, they lose it," he says. This week, Congress will once again debate the best way to add some fiscal stimulus to the economy.

Both House and Senate bills could be ready for mark-up by the end of the week.

This is one reason Bush has embarked on his high-profile swings through US cities.

Last Friday, he was in Santa Clara, Calif., exhorting Congress to pass a version of his tax package soon. "We need a bold economic recovery package so people can find work," he said.

But Congress remains divided over how to do this. Immediately after Bush's speech, democrats counterattacked.

"Republicans should face reality: more irresponsible, back-loaded, deficit-financed tax cuts based on highly conjectural economic theories will not help America's working families any more than their previous tax have," says Rep. John Spratt (D.) of South Carolina. Yes, with the war in Iraq over, the nation is now focusing on the economy.

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