[PEN-L:30460] In a country of S.U.V. drivers

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Let me highlight this from the below article:

"White House officials say they have not budgeted any particular
amount for a war. In any case, they say, the United States can
afford it."

Sabri

+++++++++++++++

New York Times, September 22, 2002

Amid the Uncertainty, Business Balks at Spending

By RICHARD W. STEVENSON and DAVID LEONHARDT


Investors are getting creamed on Wall Street. Consumers are
nervous. New jobs are scarce. Japan, the world's No. 2 economy,
is stuck in a deflationary bog and Europe remains lackluster,
providing scant hope for exporters.

But more than anything else, the course of the American economy
this year and into the next rests with corporate managers like
Calvin A. Campbell Jr., chairman of the Goodman Equipment
Corporation, a locomotive maker in Bedford Park, Ill.

At a time when corporate earnings are dismal across the country,
Mr. Campbell and his counterparts in all kinds of industries face
risks that extend from the ripple effects of a possible war with
Iraq to an uproar from shareholders demanding new standards of
corporate governance.

The choices they make in that difficult and uncertain environment
about fresh investments in factories, computers,
telecommunications equipment and other capital goods will go a
long way toward determining whether the United States continues
limping along at a modest rate of growth or restores itself to
robust economic health.

"From the perspective of the economy, uncertainty is the enemy of
growth," said Richard Berner, chief United States economist at
Morgan Stanley. "What you see in the marketplace is a high degree
of risk aversion."

Mr. Campbell, for one, is certainly cautious. He is waiting until
he gets a clearer sense of demand from customers before investing
in new cranes, computer software and other equipment. And right
now, the mining companies that pay up to $400,000 for his
locomotives remain reluctant to spend and are paying off previous
purchases more slowly. "If people can delay, they delay," Mr.
Campbell said. "There's a lot of caution, a lot of pessimism."

Mr. Campbell's experience is common. After recovering slowly for
much of this year, capital spending now appears to be weakening.
If that trend continues, the economy will have to muddle along on
the backs of consumers who, despite their jitters, have proved
willing to keep spending. Without a rebound in business
investment, economists say, the economy is unlikely to rebound
sharply. But many corporate executives, seeing a lot of dark
clouds on the horizon, are in wait-and-see mode.

"If you're a corporate executive in this environment, you face a
higher level of uncertainty ? and more sources of uncertainty ?
than you have in your career," said Robert D. Hormats, vice
chairman of Goldman Sachs International.

"You face the uncertainty about additional acts of terrorism," he
said. "You face the uncertainty about a war with Iraq, with all
the implications that holds for energy prices and a broad impact
on the economy. You face a greater degree of scrutiny of
corporate governance, which makes people more cautious in how
they run their companies. And then you face all the questions
about where the economy is going."

The effects are showing. After picking up somewhat over the
summer, the economy appears to be slowing again. The
manufacturing sector stopped growing in July and August,
according to a survey of managers by the Institute for Supply
Management. And 3.6 million people received unemployment benefits
in the first week of September, the highest number since June,
according to the Labor Department.

There are pockets of strength. Low interest rates have fueled
strong automobile sales and have set off waves of mortgage
refinancings, putting more cash into the hands of consumers and
keeping housing and related industries vibrant.

But there are also plenty of reasons for continued concern. At
the top of the list is the stock market's slide, which destroyed
nearly $420 billion of wealth last week alone. The decline is
hurting companies' ability to raise money and is forcing
individual investors to rethink everything from next year's
vacation plans to their retirement timetables.

Companies are also struggling to maintain profit margins, let
alone raise prices. Occupancy rates at the Loews Hotels chain,
for example, have returned to levels reached before Sept. 11,
2001. But with travelers more worried about costs than they were
a few months ago, Loews is selling more discounted rooms than it
did in the past.

"We were definitely seeing cautious optimism prior to a month
ago," said Charlotte St. Martin, the company's executive vice
president for marketing. "We have seen a bit of a slowdown."

Even companies with healthy profit increases do not credit the
domestic economy. On Thursday, FedEx said operating income in its
most recent quarter rose 20 percent, versus a year earlier, but
cited overseas business and a cost-cutting program as two of the
main reasons. FedEx has cut capital spending and revamped
operations to use fewer workers.

"We're cautiously optimistic" about the rest of the year, said
Michael Glenn, executive vice president for market development,
offering the closest thing to exuberance in corporate America
today.

Now, with President Bush having made clear his intention to
confront Saddam Hussein through military force if necessary,
government officials, economists and executives are adding
unsettling factors to their economic and financial planning.

One school of thought holds that the economy would benefit from a
war, because government spending on the military and domestic
security would surge, giving the economy a fiscal jolt to go
along with the one being delivered by the tax cuts Mr. Bush
signed into law last year.

But there is a broader consensus that a war, assuming that it
goes well and remains restricted to Iraq, would be neutral or
even negative for the economy.

>From the White House to the Federal Reserve to corporate
headquarters across the country, there is general agreement that
a war could affect the economy through four main channels: a
sharp rise in oil prices, a further steep fall in the stock
market, a decline in consumer confidence and a surge in the
federal budget deficit.

For now, the official line from Washington asserts that any war
will not have to be a major economic event.

Although Iraq's invasion of Kuwait in 1990 and the American
military action the next year helped send the economy into a mild
recession, federal officials say there is no reason to assume
that the same thing will happen this time. Since then, the
economy has changed.

As Alan Greenspan, the Fed chairman, told Congress this month,
the United States uses less oil relative to total economic output
than it used to. As a result, the economy is less susceptible to
an oil price spike if Middle East supplies are disrupted.

Mr. Greenspan acknowledged that previous recessions had been
preceded by run-ups in oil prices, but he said that there was
little reason to think the pattern would repeat, especially if a
war is no longer than the conflict in 1990-91. "I don't think the
effect of oil as it stands at this particular stage is large
enough to impact the economy unless the hostilities are
prolonged," he said.

Other analysts differ, however. Should the war spread to Saudi
Arabia or become regionwide, oil prices could easily rise above
$40 a barrel from their current range of $25 to $30. Such an
increase, they say, would affect both businesses and consumers in
the United States and around the world.

In a country of S.U.V. drivers, an oil price shock accompanied by
24-hour coverage of hostilities in Iraq could be enough to put a
crack in consumer confidence and weaken what has been the main
pillar of the recovery so far: consumer spending.

For now, consumers remain remarkably resilient. L. Douglas Lee of
Economics From Washington, a consulting firm, noted that with
wages rising at an annual rate of 4 percent and inflation at less
than 2.5 percent, real incomes are growing for most people. The
combination of rising income and the 2001 tax cut has allowed
many people to keep spending while increasing their savings.

"The consumer is in pretty good shape, unless you think the labor
market is falling apart," he said.

Some analysts, though by no means all, think it is. In a report
to clients last week, John Youngdahl, an economist at Goldman
Sachs, warned of "accumulating evidence that business firms have
begun another round of labor restructuring and cutbacks, in
response to earnings disappointments and a further tightening of
broad financial conditions over the summer."

On Tuesday, for example, the Charles Schwab Corporation said it
would dismiss about 1,800 employees over the next two months.
Schwab had already eliminated about 7,000 jobs, more than
one-quarter of its work force, since early 2001. This month,
Lucent Technologies announced that its sales were even weaker
than forecast, and analysts said the company might have thousands
more layoffs in coming months.

Aside from the apparent increase in layoffs, Mr. Youngdahl said,
"there continue to be statistical signs that job creation is
abysmally weak, and thus the reabsorption of unemployed persons
into the work force is difficult."

Consumers would also be hurt, financially and psychologically, by
a continued drop in stock prices. Although many analysts say
investors will probably remain nervous as long as there is talk
of war, military success could bring a quick-relief market rally.
"Uncertainty is bad for markets," Mr. Lee said. "But there's an
adage that says, `Sell the rumor and buy the bullets.' It's often
been proved true in the past."

A war could also influence markets by raising the federal budget
deficit, which is already expanding faster than Congress or the
administration anticipated a few months ago.

White House officials say they have not budgeted any particular
amount for a war. In any case, they say, the United States can
afford it.

Mitchell E. Daniels Jr., the director of the White House's Office
of Management and Budget, said one cost estimate floated earlier
by the administration ? of a maximum of $100 billion to $200
billion ? was almost certainly too high.

He said the only guideline was the Persian Gulf war in 1991,
which cost $60 billion, or about $80 billion in today's dollars.
Four-fifths of the cost was paid by the allies.

At those levels, war spending would amount to less than 1 percent
of gross domestic product, not enough for major economic effect.

It would, however, be enough to make a substantial if presumably
one-time difference in the budget deficit, which is projected to
total $165 billion for the fiscal year that ends on Sept. 30.

The uncertainties related to a war, economists said, must be
viewed against the backdrop of an economy already struggling past
excesses of the bubble economy of the late 1990's.

The full array of uncertainty is clearly visible to Mr. Campbell
of Goodman Equipment. On Thursday, he attended a lunch at an
executives' club in downtown Chicago, where candidates running
for governor in Illinois had come to speak. The discussion at his
table quickly turned to the stock market, and a few of his peers
wondered if the Dow Jones industrial average would return to its
previous peak in the next 10 or even 20 years.

A few weeks ago, after Mr. Campbell had used the word "fair" to
describe the state of his business, he recalled that another
executive said to him, "That's the most optimistic word I've
heard in a long time."

Hearing that kind of pessimism, Mr. Campbell says he wants to see
four or five months of good economic news before he begins
investing large amounts of Goodman's money. Every time people
have begun to become more optimistic over the last year or so, he
said, a new reason for worry has sprung up, be it terrorism,
corporate scandal or, most recently, the possibility of war.

"People gained confidence," he said, referring to this spring,
"and now they've lost it."

He added, "If we do go to war, I think it's going to set us back
from an economic standpoint."

Like Mr. Campbell at Goodman, many manufacturing executives, who
depend on capital spending for profits, are trying to sort
through the news from Wall Street and Washington as they set
budgets for 2003.

"It's the most indeterminable economy I've ever lived in," said
Tony Raimondo, chief executive of Behlen Manufacturing, in
Columbus, Neb., which makes metal buildings and grain dryers.
"One month, it's up and you're a little excited. The next month,
it's as bad as it's been."

Behlen's consumer business, which sells farming equipment that
typically costs a few hundred dollars, is thriving. The division
that builds factories and other structures is struggling, though
it has picked up compared with last year. In a good month, he
said, the unit will sell $3.5 million of products. Last year, it
sold just $2 million of goods in some months. Now, sales have
improved to just above $2.5 million.

But that has not made Mr. Raimondo confident enough to proceed
with a plan to expand a factory in the Northwest. "I wish I could
tell you," he said with a sigh, that "we're not part of the
problem."

Article at:
http://www.nytimes.com/2002/09/22/business/yourmoney/22ECON.html?
ex=1033358400&en=18adf36c42b3719b&ei=5040&partner=MOREOVER