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Analysis: Post-war, a patchy U.S. economy

By SHIHOKO GOTO, UPI Senior Business Correspondent

WASHINGTON, May 2 (UPI) -- There was a collective sigh of relief as the Iraq war wound down relatively swiftly and didn't turn into a prolonged Vietnam-style military conflict, as some analysts had feared.

The stock market has rebounded and consumer sentiment has improved, suggesting at first glance that the U.S. economy is back on track for growth after two years of limping along.

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Yet the job market has shown no signs of improving and seems unlikely to do so anytime soon. The Department of Labor reported early Friday that unemployment had risen to 6 percent in April, an eight-year high.

And it is the jobless rate that most people follow the closest as a gauge of the health of the U.S. economy, which could help or hinder consumer and business spending. Indeed, President George W. Bush has tried to push forward his economic stimulus package, including massive tax cuts, by arguing that his policies would create more jobs.

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But the battle for jobs and prosperity might actually be more difficult than toppling Saddam Hussein.

"The labor market always lags the rest of the economy so don't expect really good reports for a while," said Joel Naroff, president and chief economist of Naroff Economic Advisers.

"If you actually thought that the economy would surge in the month the war ended, you were dreaming. And the last place we will see the upturn is the labor markets. So, the poor job performance in April should not have been a surprise," he added.

He pointed out that the outbreak of severe acute respiratory syndrome and continued worries about another terrorist attack continue to weigh on the economy.

But from Federal Reserve Chairman Alan Greenspan to economists at the International Monetary Fund, analysts have cautioned since earlier this year that geopolitical risks, namely the war against Iraq, have been the single biggest drawback for world growth.

As a result, the toppling of Saddam's regime had been seen as a major step in the right economic direction, and investors took heart on the news. Political uncertainties eased and investors regained sufficient confidence to resume buying shares.

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At the same time, some economists have warned that growth was patchy at best, even before the onset of war. Certainly, the terrorist attacks of Sept. 11, 2001, have heightened fears about terrorism and put a damper on global trade. But many also argue the decline in asset prices since the dot-com collapse and the ensuring burst of the bubble economy aren't yet over -- and so prices could fall still further.

Meanwhile, there remains concern about an inflated real estate market. The housing sector was one of the few bright spots in the lethargic economy over the past two years. Since housing prices nationwide nearly doubled the normal pace of growth, from 4 percent to 7 percent, last year, there is fear that such gains aren't sustainable, despite low mortgage rates.

Granted, demand for new homes remained strong in March; the Commerce Department said new home sales soared 7.3 percent from the previous month and a whopping 10.6 percent from a year earlier.

At the same time, the National Association of Realtors reported that existing home sales fell 5.6 percent in March, suggesting that housing demand is already mixed.

Consumer spending accounts for nearly 70 percent of economic growth in the United States, and any sizeable downturn in the housing market could potentially hurt people's wallets much more than stock market declines, which have actually been relatively well-contained.

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Looking ahead, Bush is trying hard to keep the economy at the top of the agenda. But while he's aware that bolstering growth and creating jobs are crucial for his political survival, tax cuts alone won't be sufficient to rev up the economic engine.

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