Economic gloom increasing with talk of war with Iraq

WASHINGTON -- Worried about a possible war, Wall Street has been in a funk this year and the news on Main Street hasn't been any better. Business executives are freezing new spending and hiring, fearful of big commitments in the face of so much uncertainty.

Some analysts think the national anxiety, heightened by the loss of the space shuttle Columbia, could be enough to derail the feeble recovery and throw the country back into recession.

"The probability of a double-dip recession has certainly risen," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The economy is still mired in a pretty soft patch and we have not made it to firmer ground."

"Soft patch" was the phrase Federal Reserve Chairman Alan Greenspan began using last fall to describe a significant slowdown in economic growth. The economy, which had been growing at a solid 4 percent rate in the summer, screeched to a near halt during the final three months of the year, managing to eke out a tiny 0.7 percent growth rate.

To buy some insurance against a possible double-dip recession, the Federal Reserve in November cut interest rates by a bigger-than-expected half point, pushing the overnight borrowing cost for banks down to a 41-year low of 1.25 percent.

But so far, the extra boost from lower interest rates has not been enough to jump-start the economy. Unemployment has been stuck at an eight-year high of 6 percent as businesses have laid off nearly 200,000 workers over the past two months.

Many analysts believe when the government reports the January unemployment figure on Friday it will show that businesses did add a small number of workers last month but not enough to show an improvement in the 6 percent jobless rate. In fact, they are forecasting that unemployment will hit 6.5 percent or even higher by this summer.

"The economy is very fragile right now," said Mark Zandi, chief economist at Economy.com. "Businesses are queasy. They are not investing or hiring and consumer confidence is still weakening. Any little thing that went wrong could push us back into recession."

The Conference Board reported consumer confidence fell again in January and now stands at a nine-year low, adding to worries that consumers, who have been the one bright spot in the economy for over a year, could put away their pocketbooks.

The report on the anemic 0.7 percent growth rate for the gross domestic product in the October-December quarter showed that consumer spending, which accounts for nearly two-thirds of the economy, slowed to a 1 percent growth rate, the weakest performance in nearly 10 years.

The concern is that more bad news -- such as a U.S. invasion of Iraq that took an unexpected turn for the worse or a new terrorist attack in the United States -- could be the final blow that would guarantee another recession.

"The real risk is the war," said David Wyss, chief economist at Standard & Poor's in New York. "It can go bad in all sorts of ways and that could push us into a double-dip."

Still, even economists who are worried that the weak economy could slip back into recession rate the possibility of that occurring at only a one-in-three chance -- although they say the odds have gone up in recent weeks, especially in light of the new tumble stock prices took in January.

But many economists say the most likely prospect is that the economy will gradually improve this year, helped along by continued low interest rates supplied by the Fed and further tax cuts from Washington.

Few analysts expect President Bush's entire $670 billion stimulus package to make it through Congress, but they said the final version could offer even more stimulus this year, given that many Democrats and Republicans have complained that too much of the Bush package won't take effect for years to come, when the economy won't need the help.

The housing industry is still enjoying strong sales as mortgage rates stay at levels not seen since the early 1960s. While the Fed is running low on ammunition with its key interest rate -- the federal funds rate, already down to 1.25 percent -- economists said the central bank would not hesitate to push the rate to zero if necessary to help protect the economy from further shocks.

Economists said that while there has been a stream of bad news recently, including the shuttle tragedy, consumers showed in the wake of the Sept. 11, 2001, terrorist attacks that low interest rates, including zero-rate offers from auto companies, were enough to get them back in the stores.

"As long as interest rates are this low, consumers are going to keep spending," predicted Michael K. Evans, head of Evans Carroll & Associates, a Boca Raton, Fla. economic consulting firm. "Consumers will continue to carry the day and that will keep us out of a double dip."