War: what is it good for?

No one doubts that an Iraq conflict will hurt the area's economy; what's unclear is how much and for how long

By Globe Staff, 2/16/2003

GRAPHIC How the Gulf War impacted stocks, unemployment, consumer confidence, and other indicators.  INDUSTRIES Technology Tourism Defense Healthcare Financial services Housing Commercial real estate Banks & insurance Management consultants Biotech Telecom & utilities Retail  REPORTING This report was compiled by Kimberly Blanton, Hiawatha Bray, D.C. Denison, Ross Kerber, Liz Kowalczyk, Beth Healy, Peter J. Howe, Chris Reidy, Thomas C. Palmer Jr., Jeffrey Krasner, Andrew Caffrey, and Christopher Rowland of the Globe Staff.

war with Iraq will do harm to the Boston economy. It's only a question of how deep, how long, and where the damage will be greatest.

From healthcare, technology, and real estate to financial services and tourism, hardly a single big industry in the area will do well. Some companies are finding pockets of profit potential from a war, but overall most industries will suffer. Even Greater Boston's still sizable defense industry won't reap many immediate gains. A possible exception: Biotech stocks could get a significant short-term lift.

Most economic forecasts assume that activity around the world will essentially remain frozen, as it has been since late last year. Typical are the walk-in centers at Charles Schwab & Co., where customers keep saying, ''Why should I do anything? We're about to go to war,'' says Bryan Olson, the brokerage's vice president of investment research.

Boston's Teradyne Inc. was trying to sell electronic test equipment to California companies last week but the war threat is turning off buyers. ''A company doesn't want to make an investment and see the world fall apart,'' says Tom Newman, a Teradyne spokesman.

Under the better scenarios - a short war lasting less than two months - state economic growth this year could crawl along at a 1.5 percent pace, according to Economy.com, a West Chester, Pa., research firm. With a protracted war and sharply higher oil prices, the state's economy would actually shrink by about 0.2 percent. Employment in Massachusetts has been falling steadily and steeply for two years. Under both war scenarios, it would keep dropping.

Scenario planning for the aftermath of a war is making economists' heads spin. Will there be terrorist attacks against the United States after the fall of Iraq? Will a US occupation of Iraq destabilize the Middle East and send oil prices higher than they already are? ''Right now, we are thinking of something that has no clear endgame,'' says Fred Breimyer, chief economist for State Street Corp. in Boston. ''Things could conspire to have a substantial downdraft,'' he says, and ''then you would have to entertain a double-dip recession.''

Many people point to the experience after the short 1991 Gulf War, when the US economy picked up rapidly. That could certainly happen this time because victory would bring relief from all the uncertainty. But there's a big difference. If all goes according to US plans, the military will occupy Iraq for several years. Then there's the threat of terrorism before, during, and after a war.

Executives at Blue Cross and Blue Shield of Massachusetts, the largest health insurer in the state, say the company is prepared for an attack the size of the World Trade Center bombings. Blue Cross now has enough cash reserves - $579 million as of the end of September - to cover illness and injury claims that would result from an attack similar in size to Sept. 11, 2001, says Peter Meade, a spokesman. The insurer also has increased its computer capacity and can double the number of claims it normally processes - 700,000 a week - within 24 hours of an attack. But smaller insurers with less money in reserve may run into trouble paying medical bills if there's a large attack that causes substantial injury.

Hospitals have been preparing for months - and the cost already has been significant.

''We keep hearing that if there's a war, there will be retaliation,'' says Betsy Stengel, executive director of the Conference of Boston Teaching Hospitals. ''That's what we're all worried about. There's already been a huge impact in terms of preparations.''

Mark Zandi, chief economist and founder of Economy.com, says, ''The risks are all on the downside. If things don't go as planned in Iraq, all bets are off. The entire national economy will be in the proverbial soup - and Massachusetts will go along with it.''

Here's a look at how some of the area's big industries may fare:

Technology

375,000 people, or 8% of Mass. workforce

Akamai Technologies Inc. got its first taste of war on Sept. 11, 2001. Based in Cambridge, Akamai runs a global network of computer servers that speed the operation of popular websites like CNN.com and Yahoo, and the assault on the World Trade Center spawned unprecedented demand for Internet news. Demand for Akamai's service surged that day. ''It still remains one of our busiest days,'' says president Paul Sagan.

But demand for Akamai's services gradually waned as the shock faded. So Sagan isn't eager for war. ''People won't sit in front of their TVs and their Web browsers for more than a few days,'' he says.

Other Boston high-tech firms say any economic benefit from a war will be minor and fleeting, and in most cases overwhelmed by the war's collateral damage to consumer sentiment and business investment. RSA Security Inc., a leading supplier of Internet security software in Bedford, says orders from government agencies have risen, but from a very low base. Art Coviello, president, says government purchases made up just 3 percent or 4 percent of revenue, and have since risen to 5 percent or 6 percent. But overall company revenue last year actually fell to $232.1 million from $282.7 million in 2001. RSA posted a loss of $1.71 a share last year, much wider than its loss of 4 cents a share in 2001. Likewise, Teradyne is selling more equipment to the military - about $75 million last year - but that's just a sliver of Teradyne's total revenue of $1.2 billion.

Tourism

Already reeling, hotels, restaurants, and tourist spots would get another shock during a war, trade officials say, especially if fighting occurs during the spring and summer tourism season. In particular, says Patrick Moscaritolo, president of the Greater Boston Convention and Visitors Bureau, hostilities and terrorist threats could obliterate Boston's nascent recovery in international tourists.

Images last week of tanks surrounding Heathrow Airport in London make him worry about the viability of additional international flights to Logan Airport recently announced by Virgin Airways, Air Lingus, American Airlines, and Delta Airlines. During the Gulf War, he says, 747s were flying across the Atlantic with 80 percent of their seats empty.

''If we have war, threats of terrorism, that's the most difficult environment for us to be in,'' Moscaritolo says. A point of comparison: Right before and during the 1991 Gulf War, international passenger traffic at Logan dropped 16.6 percent and domestic travel fell 8.7 percent. The Cape and other nearby spots that people drive to will fare better.

One convention that may suffer from unfortunate timing: the International Boston Seafood Show, which has been held in Boston for 20 years. The seafood people booked the Hynes Convention Center for March 11-13. Brian Perkins, chief operating officer for Diversified Business Communications, the Maine-based show organizer, says 3,000 of the 14,000 expected attendees are scheduled to travel from overseas. So far, he says, no major cancellations.

Defense

26,000 people, or 8% of Mass. workforce

Many of the region's big defense contractors have already benefited from a rapid increase in military spending since the Trade Center attacks. But few expect a direct financial impact from an attack on Iraq, since production runs for munitions take years to arrange.

''In some cases, we're still delivering what Clinton ordered,'' says James Fetig, spokesman for Lexington-based Raytheon Co. In a few cases contractors have gotten orders to replace what are known as ''expendables,'' missiles and bombs fired in the 2001 campaign in Afghanistan, but the contracts are relatively small, and little of this blue-collar work remains in New England.

Raytheon's big missile plant in Tucson, for instance, just began shipping a $160 million order for upgraded Tomahawk cruise missiles to the US and British navies. That's just a fraction of Raytheon's 2002 revenue of $17 billion. In Providence, Textron expects to ship 33,000 tailfin-guidance kits for a cheap new smart bomb to Boeing this year, but the work is done in Valencia, Calif.

Instead of blue-collar work, New England's defense industry provides military technical services, a role that often creates an emotional impact by putting workers on the front lines. Raytheon sent several dozen technicians overseas to accompany the Army Patriot missile-defense batteries it produces in Andover. General Dynamics' Network Systems in Needham employs scores of technical personnel stationed at foreign bases.

Healthcare

64,000 people, or 11.2% of Mass. workforce

War will hurt hospitals and health insurers, but the impact will be far greater if it leads to terrorism at home.

For the past month, hospitals have been compiling lists of nurses, doctors, and technicians who are reservists and may be called up - a situation that could lead to critical staff shortages in small hospitals and in sub-specialties where personnel shortages already exist. Lakes Regional General Hospital in Laconia, N.H., for example, employs two vascular surgeons; one will leave for Iraq in ten days. The remaining surgeon, Dr. John Vignati, has promised to take as many of his cases - about 200 a year - as possible. But if Vignati, who performs about 200 surgeries of his own annually, can't handle the increase, the hospital will be forced to transfer patients to other hospitals and will suffer financially.

Larger hospitals and academic medical centers will better weather temporary absences but still face disruptions. Executives at Partners HealthCare, the largest hospital and physician network in Massachusetts, estimate 50 to 100 employees involved in patient care will be called up for a war similar in size and duration to the Gulf War. That is a small percentage of the system's 18,000 doctors, nurses, and other caregivers, but the reservists are concentrated in the hospitals' emergency rooms and intensive care units.

''Critical care areas may be disproportionately impacted,'' says Dr. George Thibault, Partners vice president of clinical affairs. ''We're trying to figure out how we would backfill those areas. We could run into a far more serious issue if this got to be bigger and longer lasting than the Gulf War. And these figures don't take into account if there's a draft.''

Academic medical centers are worried about another problem: the diversion of federal research funds away from clinical and basic sciences and towardbioterrorism. In response, Partners and the other Harvard hospitals are developing more federal grant proposals for bioterrorism related research.

The most serious and immediate impact will come if terrorists strike Massachusetts. Just gearing up is expensive. Partners, for example, expects that in 2003 and 2002 it will spend $8 million to $9 million for extra decontamination equipment, large supplies of antibiotics, new communications and security equipment and staff training. ''Going to war may increase the chances that we'll have to use the things we've put into place,'' Thibault says.

Financial services

Mutual fund companies and other investment managers have been trying to lure investors back into the stock market after the worst stretch since the early 1970s. Good luck. Stocks have fallen three years in a row. Last December investors pulled $7.8 billion out of fund firms.

The Dow Jones industrial average has slumped another 7 percent since the start of this year. More than half of that came after President Bush addressed the nation on Jan. 28 and pressed his case for forcibly disarming Saddam Hussein. A Cambridge firm that tracks money flowing into international and emerging markets, EmergingPortfolio.com Fund Research, found that investors were moving funds overseas in early January. But that changed as war looked more immediate. ''In the last week, that seemed to reverse pretty dramatically,'' says Brad Durham, managing director of research.

A widespread hope among investment firms is that stocks will roar, as they have historically, once a conflict begins and the waiting has passed. But the terrorism variable reduces the odds. Meantime, investment firms, grappling with sharply declining revenues, are cutting costs and could slash more jobs.

Though a relatively small slice of total Massachusetts employment, financial services jobs are so well-paying that they have huge ripple effects. Last year, financial services companies in Boston let go of more than 2,600 workers. Fidelity shed 1,700 employees, or 5.4 percent of its work force, in the fall, while State Street cut more than 700 positions and MFS Investments had the first layoff in its 80-year history, affecting 110 people.

Housing

Can the miraculously robust housing market even withstand war? ''Between the time it takes to put an offer in and do a purchase-and-sale, we'll probably have taken over the whole country over there,'' says real estate agent Thomas O'Connor of Prudential Prime Realty in Boston. ''The lower interest rates are fueling first-time home buyers. That overrides any hysteria.''

In early 1991, Massachusetts housing was already deep in the dumps, and fighting in Iraq did not have much of an effect. With Iraqi forces quickly vanquished, the war's end gave a boost - if a subtle one - to a gradual housing recovery that began that year.

That's not to say there won't be a slowdown. Already the high end of the market is getting a bit sluggish, says Peter Casey, president of the Massachusetts Association of Realtors and broker-owner of Prudential Wilmot Whitney Real Estate in Weston. ''That's where you have folks who don't really need to make a decision right now. They already have comfortable housing,'' so they are sitting on the sidelines, he says.

War is not a consideration for Geoffrey Ginn, a lawyer who works in Needham and has been looking for a place for more than a year. He finally found a townhouse in Needham last week. He plans to sell his house in Ashland, which will allow him to shorten his commute and spend more time at home with his wife and two young children. Those lifestyle and family issues, and the sudden availability of a house after a year of fruitless searching, trumped any thoughts of war, Ginn says.

''It's a no-brainer,'' he says. ''Our generation's a little bit different, and you've got to kind of live for the day.''

Commercial real estate

Transactions will probably dry up. ''People will attempt to postpone business decisions for as long as they can practically - till they do get a reading on the severity, duration,'' says Andrew W. Hoar, president of CB/Richard Ellis/Whittier Partners. If negotiations have been completed, lease or other deals will get signed, he adds.

The impact is already rippling. Bob Brown, president of CBT/Childs Bertman Tseckares Inc., an architectural firm in Boston, says three major projects he's working on could slow down. ''It's hard to talk about mundane issues of height and mass when your country's at war,'' he says.

''Banks and other lenders will start tightening up and saying, `Let's think about that. Let's put that on next month's agenda,''' Brown says. ''A real psychological malaise rolls in as you try to figure out, `Is this a relatively small thing like the Gulf War was, or long-term and drawn out?'''

George J. Fantini Jr., chairman of Fantini & Gorga/iCap Realty Advisors, says a war could boost the market. ''With the uncertainty out there, probably interest rates would trend downward, and in that case it could in a strange way help real estate.'' he says. ''There is nothing that impacts real estate more than interest rates. If interest rates go up - and I don't think they will in a war situation - that wouldn't help.''

Banks & insurance

125,000 people, or 3.8% of Mass. workforce

Between the bear market and the World Trade Center attacks, banks and insurance companies have been hit hard. A messy military engagement would further slam returns on their investment portfolios, which haven't recovered from the bear market, and reduce fee-income that insurers get from selling annuity products as investors stay out of equity markets. Banks' major borrowers may have trouble repaying loans, reviving credit problems at a time when lenders such as FleetBoston Financial Corp. are working to get rid of such risks.

Industry officials say they've undergone a shape-up regime that should enable them to ride out all but the worst-case scenarios. Fleet, for example, modeled what several type of war scenarios would do to business, and concluded that, right now at least, the bank doesn't need to take special precautions on its loans. ''The things you would do to prepare for Iraq are things we're doing anyway, in terms of reducing our exposure to risky credits,'' says Paul Hogan, Fleet's chief risk officer. ''The category of risky credits doesn't greatly expand because of war scenarios.''

That doesn't mean banks aren't more cautious in their lending and insurance companies more judicious in pricing policies. They are. But they were counting on a recovery this year. ''There were high hopes that 2003 would break the streak of three down years in the equity market,'' says Robert Hartwig, chief economist for the Insurance Information Institute, an industry trade group in New York.

The biggest concern facing insurers is another catastrophic terrorist attack, especially now that the Bush administration has put the nation on heightened alert, warning that an attack could come any day. Insurance companies incurred $40 billion of losses related to Sept. 11.

The heightened alert is making it harder for insurers to price new terrorism coverage that they're just now offering policy-holders, as required by a new federal terrorism-insurance law. Insurers must also decide whether to buy expensive terrorism reinsurance to spread their own risks on these new policies. Robert Restrepo, president of Allmerica Financial's property and casualty unit, says reinsurers are quoting prices that are good for only 48 hours, rather than the typical one-month quote, ''because they're concerned something might happen.'' Rapidly changing reinsurance prices make it harder for Allmerica to price its own coverage.

Management consultants

Overall, their suffering won't let up through a war. But leave it to management consultants to find a niche nonetheless.

Darrell Rigby, head of Bain & Co.'s Worldwide Retail Practice, is busily working with clients on what's called business continuity advice. ''A lot of things that we would normally encourage - to prepare for the unexpected - just get amplified in this environment,'' he says.

Scenario planning also speeds action if a crisis occurs. ''It's like a family that's well prepared for a fire alarm,'' he says. ''If you've already thought about it, you don't have to waste time exploring every possible course of action at the time of the event.''

At Boston Consulting Group, Sandy Apgar, a director who leads the Global Infrastructure and Real Estate practice, is preparing a ''surviving disaster'' brief that the group will circulate internally, and to clients, alumni and ''thought leaders.'' He says every company should have a simple straightforward business continuity plan. A quarter of the companies BCG surveyed had no plan, and three quarters are spending less than $1 million a year, Apgar says.

It's important also to have a clear structure for leadership and key staff succession, combined with cross training and testing. ''We know that saves lives and preserves businesses,'' he say, citing Morgan Stanley, which instituted contingency planning after the first World Trade Center attack in 1993. As a result the company lost only six out of the 3,700 employees who worked in the complex on Sept. 11.

''You often hear people say that the military could learn a lot from business,'' says Apgar, who served as an assistant secretary in the Army for installations logistics and environment from 1998 to 2001. ''But in this area the opposite is true: Business has much to learn from the military.''

Biotech

30,000 people, or .9% of Mass. workforce

Stocks of a number of firms - and possibly the industry -

could get a lift from a war. That's because several biotech companies are developing vaccines and other remedies to help in the event of bioterrorism attack.

Avant Immunotherapeutics Inc. of Needham is developing a combination vaccine, to be taken orally, against anthrax and plague. The work is funded by the Department of Defense. Other firms active in bioterror protection work include Isis Pharmaceuticals Inc. of Carlsbad, Calif., Corixa Corp. of Seattle and Acambis PLC, with operations in Cambridge, England and Cambridge, Mass.

How powerfully can a real bioterror threat move these stocks? Just when the civilian anthrax attacks were gripping America in October 2001, Avant said it would subcontract to Dynport Vaccine Co. of Reston, Va., which has a 10-year contract with the Defense Department, to develop vaccines including treatments for anthrax and smallpox. In two days, the firm's shares rose more than 70 percent to $5.15 in extremely heavy trading. The gains didn't last; Avant shares have traded between $1 and $1.50 over the past six months.

''War is usually of no interest one way or another to Avant,'' says Una S. Ryan, president and chief executive of Avant. ''but in this case, if biological weapons of any sort are used, they'll stimulate the need for products like the ones Avant is developing. It will stimulate investment in companies that do have biodefense technologies, especially those with the credibility of having a contract.''

Will the halo last? Probably not, if past biotech rallies are any measure. Dr. Daniel B. Dubin, president of MedaCorp, a firm that provides investment research on biotech firms, says it's important to separate the hype from actual financial benefits that might accrue to firms working on biodefense. ''A war will be a way to highlight products that have potential applications,'' he says, ''But it's imortant to separate out near-term products that could be sold from those in early stages of development.''

Telecom & utilities

These companies have terrorism on their minds, too, but they don't expect any benefits.

''When you think about the 1991 Gulf War, now it's a totally different ball game because of Sept. 11,'' says Verizon Communications spokesman Jack Hoey. Hoey says Verizon, which maintains bunker-like backup network command centers in undisclosed locations, looks to existing contingency plans for hurricanes and natural disasters in thinking about how to respond to possible terrorism, and has also developed extensive strategies to gird for ''cyberattacks'' on its phone and data networks.

The Gulf War and World Trade Center attacks gave short-term boosts to use of teleconferencing and videoconferencing as an alternative to business travel. Telecom carriers say they could see a bump again but don't envision a big enough war-related boom to affect revenues and profits in a noticeable way.

Retail

575,000 people, or 17.1% of Mass. workforce

War isn't too good for consumer confidence.

Neither is a show of armed force outside a mall.

Security is a Catch-22 issue for big stores, says Bob Gottlieb, a former mall executive who heads Sceptre Group, a Maynard consulting firm. Keep security too low-key, and shoppers may feel unsafe.

But turning a mall into a fortress can be even more alarming. ''You don't want guards walking around with 9-millimeter weapons on their hips.''

Merchants have other worries. War drives up oil prices, consumers will spend more on gas and home-heating bills and less on clothing, DVD players, and restaurant meals.

Then there is mood. At the National Retail Federation, spokesman Scott Krugman says the combo of Sept. 11 and the ''CNN effect'' translated into empty stores. ''Everyone was shell-shocked and glued to their TVs,'' he says. A few days later, consumers began to return to the malls, but they didn't buy much.

The pain won't be distributed equally, as any store selling duct tape last week learned. After the Trade Center attacks, demand surged briefly at Tweeter Home Entertainment Group, a consumer-electronics chain based in Canton. Sales of projection TVs jumped sharply. BJ's Wholesale Club Inc. of Natick had a run on canned tuna fish and bottled water. At Legal Sea Foods Inc., a Boston chain of 26 restaurants, sales fell in city restaurants after 9/11, but held steady in suburban locations, says chief executive Roger Berkowitz. People were ''tethered to their homes,'' and when they did go out to eat, they ''migrated to what they knew,'' Berkowitz says. ''They wanted safety zones, places where they felt comfortable.''

This story ran on page D1 of the Boston Globe on 2/16/2003.
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