QUERETARO, Mexico, Oct. 28 (UPI) -- This week, at last, we come to it: what economists clumsily call negative growth. Wednesday it will be announced, almost certainly, that the U.S. economy contracted in the third quarter.
And then there is the war. The bombing of Afghanistan will go on. There is little sign so far that it has hurt Osama bin Laden's al Qaida terror network or Afghanistan's ruling Taliban government.
And there will probably be more civilian casualties. Yet the business world may trouble itself less about this than the home front. More cases of anthrax will be feared. Those that have already occurred will be investigated.
Recession, war, anthrax -- could the outlook be worse? Strangely, the stock market may do well.
What is the reason? It is all a question of a specialty of the stock market -- discounting.
It has been clear to most Wall Street economists for some months that the U.S. economy would struggle in the third quarter to avoid "negative growth: "that is to say, lower economic output in the third quarter of this year than in the second. The terrorist attacks of Sept. 11 made this outcome all the more likely because, for the best part of a week, they paralyzed air transport and, even since then, they have affected morale and, probably, the willingness of businesses and consumers to spend: everyone has become more cautious.
Thus, economists have begun to expect bad news when the government's preliminary estimate of GDP growth in the third quarter is released Oct. 31. However bad Wednesday's news on the economy, it will no longer be news. It will already have been discounted.
The economists will be looking forward to the potential for recovery. And much of Wall Street appears to have decided that with President George W. Bush cutting taxes and spending more and Federal Reserve Chairman Alan Greenspan having cut the Fed Funds Rate by 4 percentage points this year to just 2.5 percent (and with another rate cut expected Nov. 6) the prospects for recovery in six months' time are good. We would disagree. But that is by the by.
Greater potential for an upset comes from the battle with terrorism. Poisoning from inhaled anthrax has already claimed three lives. The threat is not easily countered and reports of new cases in new venues will trouble Americans.
Equally, some breakthrough in the hunt for the poisoners would be very positive. And, in this regard, there has been perhaps important development over the weekend. The Washington Post reported Saturday that the FBI suspected extremists in the United States, not an overseas terrorist organization, might be responsible for the anthrax attacks. This may not be correct but if it is confirmed it will probably be interpreted by the markets as good news.
Madmen within the country -- more Timothy McVeigh-style extremists-- may be just as deadly as Osama bin laden or Saddam Hussein but they are also more easily pursued.
Another element in the assessment of whether prospects are improving or getting worse is the oil price. A rising oil price is seen by some as being an important factor behind the sudden slide in the U.S. economy after so many years of high growth. A falling oil price may suggest to many that yet another positive factor will be brought to bear on the U.S. economy in coming months. With oil cheaper, consumers will have more disposable income to spend on other products.
In this regard, the prospects do look promising. The oil price has slipped in recent weeks below the Organization of Petroleum Exporting Countries'$22-28 target range. OPEC countries are not keeping to the quotas they had determined. According to the international Energy Agency in Paris, the 10 leading OPEC counties produced 24.5 million barrels per day of crude oil in September, 1.25 million barrels per day above their own target. OPEC countries are reluctant to cut their production when non-OPEC countries are raising theirs. With global demand for oil weak, OPEC risks losing market share if it cuts output.
Venezuela's President Hugo Chavez has been campaigning for a cut in OPEC output. Chavez said Thursday that Saudi Arabia, Iran, Iraq and Venezuela --all OPEC members-- have agreed to cut production by about 1 million barrels per day.
Yet Chavez's 20-day tour to rally support for production cuts, which ended at the weekend, does not look to have been much of a success. Chavez said on his tour that OPEC cuts would be useless if non-OPEC countries do not cut, too.
But the chances of that look poor. Russia's President Vladimir Putin told Chavez he would not cut output. Putin is keen to back the U.S. fight against the Taliban and unlikely to do anything now that would upset his recently improved relationship with the United States. And Russia needs the money: it would gladly step into any breach left by OPEC cuts.
Chavez's brief meeting Friday with Mexico's President Vicente Fox looks equally unpromising. No statement was issued. But Fox is most unlikely to risk jeopardizing his close relationship with President Bush when the latter is fighting a war.
There has been much speculation in Mexico about the danger of the United States being distracted from Fox's effort to improve the status of Mexican migrants in Mexico and add to the number of legal migrants. Of course, the United States is distracted---temporarily, at least. But Fox will want to avoid turning U.S. distraction into dislike.
And so another week of great uncertainty and danger lies ahead. But our expectation at present is, as we thought a week ago, that U.S. stocks will end the week up and the euro, which suffers when optimism on the United States is rising, may fall below its already weak current level of 89.4 U.S. cents.
The oil price may be bolstered by statements from OPEC that production is gong to be cut. But we see a considerable possibility this week and in coming weeks that the oil price will plummet. And a falling oil price may be another factor that will push up U.S. stocks. Yet this rally will peter out, we think, next year, when it becomes clear not all will be well in six months.
