04 Apr 2003 When Confidence Returns
The proof of the negative impact of the war on the economy came this week as the government released several major historical indicators. Both manufacturing and non-manufacturing sectors showed rather dramatic contraction, to levels not seen since October 2001. Both business leaders and consumers alike continue to delay their investment and spending decisions in the face of the Iraqi war.
Previous wars have helped the economy as manufacturing ramps up to supply the military’s needs. But the military is not losing much equipment, and they were already well stocked. Furthermore, our economy is much larger than in past wars and defense spending relative to the total economy is considerably smaller. The Congress voted to give President Bush $62.6 billion for the war effort, less than 1% of the $10.5 trillion U.S. economy. According to of Bloomberg News, peak defense spending during WWII reached 38% of the U.S. economy’s output;Korea hit 14%, andVietnam reached 9.4%.
Some say there is a degree of permanent loss to the economy as spending must increase for anti-terror security while border inspections impede the free flow of goods. American history belies that premise as ingenuity, innovation, and technology have always provided the necessary improvements and practices to address the concerns of the day. Current challenges should prove no different.
Total non-farm payroll employment declined by 108,000 in March, but the unemployment rate was unchanged at 5.8% or 8.4 million people. Employment declined in manufacturing, retail, transportation, and government. The construction industry, however, saw an increase of 21,000 jobs.
We are entering the early stages of the corporate earnings cycle for the first quarter of this year. Most companies will likely blame the war, higher energy prices, and bad weather for presumably lackluster results. It remains to be seen what they will say about the coming year, what analysts will do with their earnings projections, and how the market will react. The market is clearly still war-driven and very emotional.
In speaking to and reading the comments of business leaders throughout the country, I learn that they are holding back significant amounts of cash as well as plans for business ventures and projects. Their plans are approved and ready for execution, but they await the final go-ahead from management. And management awaits the conclusion of the war and the uncertainty it breeds.
The political and ideological divide in our country, made more apparent during the 2000 presidential elections, has been amplified further by the war. It is remarkable to note the degree to which the vaunted objectivity of our press and media has succumbed to editorial bias and personal slant (ok, on both sides of the question). Careers of photographers and journalists have been ruined or forever altered when they are caught altering the truth, as the photographer for the LA Times did, or when they express personal dissatisfaction with the American effort on ‘enemy’ propaganda media as Peter Arnett did.
The point is that the market is driven up or down by the reports that come from these journalists. As investors, we must try to understand, as objectively and unemotionally as possible, what the events are that shape this war, its likely outcome, and its likely effect on the world’s economies in its aftermath.
As discussed in earlier Briefs, confidence remains in short supply – everywhere except possibly in our military and Administration. The coreU.S.economy remains very strong, but that strength is well-hidden beneath the fog of near-term uncertainty. Confidence will return to ‘normal’ levels at some point. When is the question? We do know, however, that confidence breeds confidence. A successful end to this conflict will help prime the confidence pump and get investment going again throughout. It will be like a chain reaction where small investments breed larger ones, where modest product upgrades give way to major creative destruction by dramatically new innovation.
My best ‘objective’ guess is that this war is near a successful completion. Arab acceptance and approval of the campaign, at least at official levels, will follow soon thereafter. Detracting world leaders will join the rally as well when they hear the more favorable characterizations coming from Egypt, Saudi Arabia, Jordan, and maybe even Syria and Iran (as they see the tide shifting away from one of America-bashing).
Just as we were conditioned to believe the good times would never end in the late 90’s, we are now heavily influenced by conditioned pessimism. There’s plenty wrong with the world and with the economy to make a convincing case that things will not soon improve or that the economy will even roll back into recession. But this view ignores the basic strengths of the economy such as high productivity, high employment by historical standards, the low cost of money, and the strong will and conviction of most Americans to get this economy up and moving again. If the more optimistic outcome is realized, stocks are cheap.