End of War Would Help US Economy Snap Back

PEACE when it comes should be bullish for the United States economy. Most economists expect the war in the Middle East to end within several weeks. And they figure this should stimulate the economy, and probably the stock and bond markets. ``Peace would give a clear boost to consumer and business confidence,'' says Larry Wipf, an economist with Norwest Corporation in Minneapolis. ``If we get an end to the war in the next few weeks, we would get a pretty vigorous snapback in the economy in the middle quarters of this year,'' predicts Patrick Corcoran, an economist with the Prudential Insurance Company of America. Lawrence Kudlow, chief economist, Bear, Stearns & Co., says: ``[Peace] enhances the possibility of a short recession.'' If the war is extended, Federal Reserve Board chairman Alan Greenspan warned Congress last week it could undercut public confidence and spending. An end to the war, economists say, could: 1. Reduce oil prices. 2. Trim inflation. 3. Encourage the Federal Reserve System to ease monetary policy and thereby lower interest rates. 4. Boost the US dollar. Indeed, Mr. Kudlow sees the dollar gaining as much as 15 to 30 percent in value this year against the currencies of other major trading nations. So far, the statistics show continued economic contraction. Housing starts fell 12.8 percent in January; payrolls fell 232,000. Production at US factories, mines, and utilities declined 0.4 percent in the same month, the fourth drop in a row. Retail sales are down. But the majority of economic forecasters anticipate recovery by the last half of this year, according to a survey earlier this month by Blue Chip Economic Indicators (Sedona, Ariz.) Real gross national product, according to this consensus of 50 economists, will rise a modest 0.1 percent for the whole year - the same amount as assumed by the Bush administration in its budget. In 1992, the nation's output of goods and services will grow, after inflation, by 2.5 percent, the panel reckons. Following Iraq's invasion of Kuwait, the measures of consumer confidence dived sharply. Reduced retail sales helped push the economy into recession. ``It was mainly a psychological reaction,'' says Sam Nakagama, a Wall Street economic consultant. That slowdown was accentuated by a credit crunch imposed by commercial banks, strapped by bad loans, the need to build capital, and tougher regulation. Mr. Nakagama expects peace to bring a rebound in ``big-ticket activity'' - house, car, and durable goods purchases. Such a rebound, says another Wall Street economist, Arnold Moskowitz, should give a boost to retailers, building supply chains, and the real estate business. Dr. Moskowitz, of Moskowitz Capital Consulting Inc., expects peace to bring oil prices of $15 to $18 a barrel for perhaps six months. That would mean lower gasoline prices. He also sees banks reducing the prime interest rate they charge their better customers to 8 percent from its present 9 percent. That would lower the charges on most home equity loans. Interest rates on fixed-rate mortgages should decline to 9 percent from 10 percent at present, he forecasts. Moskowitz also predicts that the Dow Jones industrial average will climb to about 3,100 or 3,200 by the end of this year, and 3,500 to 3,600 by the end of 1992. Thus he estimates the return on stocks for the rest of this year will be 12 percent. Bonds, he says, will do a bit better with a return (interest plus capital gains) of 15 percent. ``Those are pretty good returns,'' he says. Mr. Kudlow doubts that interest rates will drop as much as forecast by Dr. Moskowitz. ``Ninety percent of Fed easing is now behind us,'' he says. Nonetheless, these economists do assume the Fed will continue an easier monetary policy. Anatol Balbach, chief economist at the Federal Reserve Bank of St. Louis, notes that bank reserves and the ``monetary base'' (bank reserves plus currency) have started growing again this year after a long period of stagnation. So the nation's money supply should also start growing faster soon, he figures. Money, the fuel for economic activity, has been growing at a mere 1 to 2 percent annual rate since November. At a meeting last week in Bal Harbour, Fla., AFL-CIO leaders called for a major jobs program to combat the recession by putting some of the nation's 7.7 million jobless back to work rebuilding the nation's highways, bridges, and housing stock. They also called for revival of the unemployment insurance system, now providing benefits to less than a third of those jobless. However, President Bush's budget put the emphasis on indirect efforts to provide jobs - a capital-gains tax, enterprise zones, and other such ``incentive-oriented'' measures, notes Kudlow. If Mr. Bush uses the prestige and political strength obtained by a Middle East victory to win a ``pro-growth policy'' at home, it could be ``very positive'' for the economy and the stock market, he says. -PATHNAME- /usr/local/etc/httpd/plweb/DBGROUPS/paper/database/tape/91/mar/week10/arec.