LONDON, Feb. 16 (UPI) -- Regular readers will be aware of our view of the prospects for the U.S. economy and stock market: down like a ski slope, but less fun. Both are losing ground after the 1990s bubble. But economies and, even more so, stock markets trace a jagged line, like the blade of a saw, not a ski slope. And now, in both the U.S. economy and the stock market, we may see an upward move, perhaps a sharp one, in the midst of the secular downtrend.
The biggest reason is war, or rather, the lack of it.
It has been a tumultuous weekend. Huge crowds turned out in European capitals to protest against the war on Iraq for which U.S. President George W. Bush has been pressing. These crowds, the largest of which was an estimated 1 million people in London, have piled up an enormous barricade. A war that in recent weeks had appeared to become more and more likely has suddenly been blocked in a way that will give Bush and, even more so, British Prime Minister Tony Blair, Bush's chief international ally, huge problems. It will take courage to seek to dismantle a barricade of that size, assembled by so many people.
For Bush this must be a frustrating moment. Whether he has persuaded Americans of the necessity for war is unclear; that he has failed to persuade most Europeans is not. Blair, it is clear, faces huge opposition in Britain. If he is unwilling to commit British troops to an invasion, Bush will be left to go it alone. That, in turn, might prove hazardous for him.
For a war that Bush first considered pursuing without approaching the United Nations now has a host of enemies. Extraordinarily, a septuagenarian Swedish bureaucrat, Hans Blix, the chief weapons inspector, now looks a very substantial obstacle to the world's most powerful man. The U.N. and its weapons inspectors want more time. By failing to give them more time, Bush, in his struggle to eliminate the Iraqi dictator Saddam Hussein, is going to turn himself in the eyes of many into an aggressor.
For financial markets, these events matter considerably. The U.S. stock market -- and stock markets around the world -- have been assuming that war would happen imminently and have been taking a negative view of it. So what do they do if the march toward war is suddenly deflected by the march of protesters? Our guess would be that the markets rally.
Friday, in a day of great volatility, U.S. stock markets did just that in the morning, then retreated fearfully in the middle of the day, then stormed toward the close. The Dow Jones industrial average rose by 2 percent; the technology-laden Nasdaq, by 2.6 percent.
These nervous but marked rises Friday follow a grim run for the markets. After closing Jan. 14 at 8,843 points, the course of the Dow did resemble a ski slope, down for four weeks in an almost unbroken fall that eroded 12 percent of its value and took the index to a four-month low.
Now the fear that war is imminent may subside a little. This depends of course on how strongly the Bush camp is able to fight back against Friday's report by Blix's weapons inspectors and the demonstrations that marked the weekend. But our guess would be that this is the likely outcome: the attack that the United States and the U.K. have long thought of launching before the heat of spring and summer mounts in the desert may at least be delayed until the autumn. In the markets, fear may give way to relief -- and to renewed belief in the U.S. economy.
The economy, like the stock market, does not move smoothly down or up. After a dull fourth quarter of 2002 for the U.S. economy, with annualised growth at a meager 0.7 percent, data giving early indications for the first quarter of this year have been more promising.
The retail sales report in the past week showed sales excluding automobiles rising by 1.3 percent in January compared with December. Industrial production, in decline for three years, rose by 0.7 percent in January, its best result since July 2002. "The strong increase in January 2003 industrial production confirms that the industrial sector is rebounding from the decline in industrial activity during fourth quarter 2002," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI. Meckstroth pointed to "a positive turn in business equipment production."
Why should the economy do a little better? There are a number of factors -- or, should we say, stimuli.
The strong post-October rally in the stock market -- which began to evaporate in mid-January -- may nonetheless have spurred consumption in January itself.
Still lower mortgage interest rates since the beginning of this year, with the average rate on 30-year, fixed-rate mortgages now down to 5.86 percent, a 19-year low, are helping to keep the refinancing bandwagon going.
And then there is the prospect of still more tax cuts -- provided Bush wins Congress's support for his latest proposals for a third round of fiscal stimulus for the economy.
In short, economic policy in the United States continues to be targeted at sustaining consumption with all the determination that Bush shows for targeting Saddam.
So if war is postponed, we may see a relief rally in the stock market and firmer consumer spending and a little increase in investment by companies. A small rebound in economic growth in the first quarter may be accompanied by a more pronounced one in the stock market.
But is this the dawn? We would say not. Investors who want to profit from the rally we expect should be fleet-footed, for it is unlikely to last.
The longer-term outlook remains not so much unsure as, in our dismal view, negative. The United States can afford its fiscal stimulus rather better if war in Iraq is avoided but even then the fiscal taps cannot be run for much longer, given the rising deficit, nor can interest rates be cut much more, nor can house prices spiral much higher.
The worst adversary of the U.S. economy is not, as the markets seem to believe, the war with Iraq that has seemed imminent but the need to correct the imbalances built up in the bubble years.
Shocking parallel: Fiscal stimulus in the United States will, just as in Japan, not sustain economic growth for long. Nor will ultra-low interest rates provide a permanent cure.
Policy aims to keep the consumer consuming, but the reality is that the free-spending U.S. consumer needs to spend less and save more. Only when he or she has passed through that phase will the long downslope of the U.S. economy and stock market finally be at an end.
So if there is an upturn, snatch at it hungrily. By summer or autumn it will be gone. And the drums of war -- even if they are silenced for a time now, as we think -- may well be beating again.
(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected].)
