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Rebuilding Iraq

THE ECONOMY AND THE WAR

The road beyond Baghdad

Months of slow growth ahead for US

By Robert Gavin, Globe Staff, 4/10/2003

   
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 EARLIER REPORT

How much damage will war do to the Massachusetts economy?

 GRAPHIC
Graphic
How the Gulf War impacted stocks, unemployment, consumer confidence, and other indicators.

The fall of Saddam Hussein's regime should provide a boost to the struggling US economy, but even under the best of circumstances the nation and the state still face several more months of slow economic growth and weak job markets, economists said yesterday.

The military successes in Baghdad will almost certainly reduce the uncertainty that has been widely blamed for stalling the recovery and restore consumer and business confidence that sagged during the buildup to and the execution of the war. That, in turn, economists say, should help boost consumer and business spending needed to increase production and -- eventually -- hiring.

Still, economists said this turnaround -- barring any other shocks, such as terrorist retaliation -- will be slow in coming as the economy continues to work out other weaknesses, such as excess factory capacity, still left from the bursting of the technology and stock market bubbles of the late 1990s. Most economists see moderate growth in output beginning in the second half of the year, but the unemployment rate remaining stuck around 6 percent until the end of year, when job growth should pick up, accelerating in 2004.

''Businesses are not going to wake up tomorrow and say, `I'm going to hire some people,' '' said Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis. ''Economic problems are not going to be swept away at the end of the war.''

Businesses, while more hopeful, remain cautious. For example, David Glispin, owner of Sunshine Sign Corp. of North Grafton, says he expects revenue to grow 10 percent this year, but war or no war, he's not going to add to his 26-person work force unless there's a more substantial pick-up in business. Like many other businesses, Sunshine Sign has been hit with rising costs, such as healthcare premiums and energy, as it is forced to hold down prices to keep customers.

''The more question marks you can erase from the horizon, the better,'' Glispin said. ''Right now, I am cautiously optimistic. When I become optimistic, that's when we would look to hire.''

Among the questions remaining, economists say, is how long it will take companies to return to robust hiring and capital investment. In recent weeks, economists have debated how much the war was dampening the business confidence needed to fuel the recovery, with some downplaying weak data -- including the loss of 465,000 jobs in February and March -- as largely a product of war fears.

Others, however, have argued that the war, while not helping, hardly deserves the blame for a weak economy that still has further to go to squeeze out the excesses of the 1990s bubble. In addition, some economists have said, the uncertainty, while lessened, has not vanished with the difficulty and expense of occupying Iraq still unclear and North Korea's nuclear program still looming as threat.

It could take until next month, when economic data from April is reported, to get a clearer view of how much the war has contributed to the weakness of the past two months, economists say. But one of the first glimpses could come tomorrow when the University of Michigan releases its survey of consumer sentiment, which measures confidence, for early April.

Growing confidence would be particularly important to the Massachusetts economy, which has a high concentration of industries that depend on it, including financial services and technology. Still, many Massachusetts businesses said it's likely to take awhile before any surge in confidence is followed by a surge in profits. And ultimately, it is corporate profits that drive economic expansions and job growth.

''I think we would benefit from anything that eliminates some of the uncertainty,'' said Joseph Alsop, chief executive and cofounder of Progress Software Corp. in Bedford. But he added, ''The big thing that's been hanging over the high-tech market has not been the war. It's been the three-year slow down in high-tech capital spending.

''I think it will be a continued slow improvement over the next couple of years,'' he said. ''I absolutely do not see a boom.''

For the hard-hit telecommunications industry, the situation is similar. Ron Sege, chairman of the Massachusetts Telecommunications Council, a trade group, said that anything that reduces risks and in turn prompts more spending and investment is good for telecom. But, added Sege -- who is chief executive of Internet switch maker Ellacoya Networks in Merrimack, N.H. -- the main problem remains the overbuilding of the late 1990s.

''We're [still] working off too much capacity'' in equipment makers and service providers, Sege said. ''If you took away all the geopolitical uncertainty, I think we still would be struggling with the other issues.''

Other key sectors of the Massachusetts economy predict little help from the war's end. Hospitals, among the few employers adding jobs during the downturn, say they don't expect any significant rebound in the number of international patients, which fell sharply after the terrorist attacks of Sept. 11, 2001. At Massachusetts General Hospital, outpatient business from overseas fell 20 percent over the past two years, while overnight stays dropped 25 percent. From 2001 to 2002, Children's Hospital in Boston saw a 22 percent fall-off in international patients, generally some of the best-paying patients because they often pay full hospital charges. And at both hospitals, the majority of cancellations involved Middle Eastern patients, who now must wait three months for visas rather than six weeks.

''I don't think any of us know what's going to happen with international volume,'' said Dr. Britain Nicholson, Mass. General's chief medical officer. ''But if patient volume from the Middle East is going to rebound, it's going to rebound very slowly. There are too many unknowns out there. Right now European institutions are taking up the slack. And once those referral lines become established it will be hard to win back the volume.''

The travel and tourism industry also expects a slow rebound in international customers, who tend to spend much more than domestic travelers.

Juergen Bartels, joint chairman of Le Meridien Hotels and Resorts, a London-based operator of 149 hotels worldwide, said Tuesday he doesn't expect to see any immediate increase in customers after the war. ''We're not going to get a grip on this in the next six months,'' he said ''Prewar, people were holding their breath for war. After the war will be like that.''

Robert Gavin can be reached at rgavin@globe.com. Hiawatha Bray, Chris Gaither, Beth Healy, Peter J. Howe, Ross Kerber, Jeffrey Krasner, and Thomas C. Palmer Jr. of the Globe staff contributed to this report.

This story ran on page C1 of the Boston Globe on 4/10/2003.
© Copyright 2003 Globe Newspaper Company.





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