Sunday, February 9, 2003

Analysis


Parallels with '91 fade fast

By Rachel Beck
The Associated Press

NEW YORK - The similarities are hard to ignore: A Bush is in the White House, a war is brewing in Iraq and the U.S. economy is on a shaky path.

Today sure sounds like 1991 all over again, and that's why everyone from Wall Street to Main Street is looking to the past for hints about our economic future.

It's when you dig a little deeper that you see why history might not help.

The economy is in much better shape now than it was back then, when a recession and wartime coincided. And that could mean today's economy won't be as scarred by the effects of war.

"This economic cycle may seem very reminiscent of the last cycle during war, but we are much farther along today than we were then," said Scott Pedowitz, an interest rate strategist at Commerzbank Securities who wrote a report on the subject.

That's not to say that looking back at the economy during the Gulf War isn't useful as a gauge for how it might react today.

It is the best blueprint for a modern war, where so much advanced positioning rattles businesses, consumers and investors well before the fighting even begins.

But there are real distinctions between wartime and the economy then and now.

"There is no doubt that there is much better support in the economy right now, and that is important," said Gary Thayer, chief economist at the St. Louis-based brokerage firm A.G. Edwards & Sons Inc.

The Gulf war took place during a recession that resulted from an economic slowdown following the investment boom of the late 1980s. The recession started in July 1990, a month before Iraq invaded Kuwait, and ended in March 1991, a month after the war ended.

Today, the economy has already started to climb out of a slump following the bursting of the late 1990s dot-com bubble. And while current growth remains very slow, gross domestic product hasn't declined since the third quarter of 2001.

Another key difference has to do with inflation. In the early 1990s, the inflation rate jumped to around 6 percent. That meant consumers weren't only squeezed by the threat of war, but they were feeling the stress of higher prices also.

Inflation today barely exists, and some economists even say we are experiencing disinflation, or possibly deflation in certain product categories, including clothing and electronics.

And then there are the stark differences in interest rates.

The federal funds rate, the interest that banks charge each other on overnight loans, was at 6.75 percent at the start of the Gulf war, after six rate cuts that began in July 1990. And after the war, the Federal Reserve cut interest rates 12 times over two years to push rates down to 3 percent at the end of 1992.

Today, interest rates are at 1.25 percent after 12 rate cuts by the Fed over the last two years. The low rates have helped buoy consumer spending, especially of homes and autos.

So while history often can give guidance, it doesn't always provide answers.




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