Victory's Dividend

By RICHARD BEHAR

When Johnny comes marching home, will the rest of us celebrate by tramping off to the mall or auto showroom? Business-people and investors across America are pondering that question, trying to balance widespread forecasts of at least one more recessionary quarter against the euphoria of a swift battlefield victory. Does peace mean prosperity? If the gulf war didn't start this recession, what role will Kuwait's liberation play in ending it?

War, not peace, typically stimulates huge demand for goods and services. That didn't happen this time, in part because this war was fought mostly with stockpiled off-the-shelf weapons and munitions. Now a growing number of economists and businesspeople are predicting, suggesting, hoping -- praying -- that the cease-fire will trigger an improvement in the economy by boosting consumer confidence and spending. "Peace is a jump-starter," says John Tuccillo, chief economist of the National Association of Realtors. "This is the catalyst that can get the thing cooking. It's not the whole story, but it is a spark, and that's important because this is an economy that needs a spark."

No experts are foolish enough to predict that peace will obliterate America's severe economic woes -- its mountains of debt, its banking crisis, its depressed real estate market. But a consensus holds that peace and national pride will at least erase the preoccupation with war and TV bulletins that has turned the slush of a winter's recession into a frozen economic tundra. Among the areas showing signs of a peace-prompted thaw:

Consumer Confidence. It plunged after the gulf crisis began and in January finally dragged consumer spending down with it. That's important because such expenditures account for two-thirds of America's economy -- so it's heartening that confidence suddenly reversed course in February, posting a small improvement. For the first time in five months, the closely watched monthly consumer confidence index of the Conference Board, a business research group, rose 2.6 points, to 57.7. That's still way below last July's 101.7, but it's a start. It also fails to reflect consumer reaction to the cease-fire, which was announced after the survey was completed. Says economist Paul Erdman: "The American nation refound its confidence on the Persian Gulf battlefield. That confidence is seeping down into the national psyche and could help bring on an economic renewal. The war showed we don't have to play second fiddle to anybody, that we don't need the Germans and the Japanese to help us accomplish something."

Wall Street. Victory had been discounted for several weeks by the stock market, where a raging bull can help trigger a speedy recovery. The Dow Jones industrial average closed this week at 2909.1, up 6.3% in the past four weeks and up 544 points, or 23%, since its October low. Daily trading volume since January has averaged 195 million shares, 19% higher than a year ago. If this keeps up, the securities industry will post its most profitable quarter in nearly a year. Assets of mutual funds -- including risky small-company and junk-bond funds -- grew a record $59 billion in January, and the frenetic pace continued in February. "This is the first popular war since World War II," explains Bill LeFevre, senior stock-market strategist for Tucker Anthony. "You could very well see the consumer celebrate by buying that postponed car, TV or refrigerator. This will go a long way toward turning the recession into recovery." Stocks have accurately forecast seven of the eight recoveries since 1949, while the biggest bull market in history started in the 1982 recession.

Oil. Say goodbye to fears of $50-per-bbl. oil. World oil supplies are greater than they were a year ago despite the lack of production from Iraq and Kuwait. With the war over, most experts foresee a temporary plunge to as low as $15, which can only help consumers. Even if OPEC reins in production and maintains a price of $21 per bbl. or so, as it apparently would like, most consumers can live with that, and business had been forecasting such a price for 1991 before Iraq's invasion of Kuwait last summer. Gasoline prices are lower than before the invasion, if the effect of a new nickel-per-gal. federal tax is discounted. Cheaper jet fuel is welcome news for the nation's tortured airline industry.

Housing. Tuccillo of the National Association of Realtors says the biggest impact of peace on the housing market may be regional. Most of the American troops in the gulf were pulled out of the southeastern U.S., he says, where merchants have suffered and housing markets have stagnated as a result. Says he: "Maybe the biggest bump we'll see in the housing market will be in that section of the country, when we repatriate the troops and they get on with the lives they've put on hold for six to eight months." Thanks to falling interest rates and softer prices, the housing industry's Home Affordability Index is at a 14-year high.

Trade and Manufacturing. With exports growing impressively, the U.S. merchandise trade deficit shrank to $101 billion last year, the smallest imbalance since 1983. Resolution of the gulf conflict may have set the stage for further improvement. Kuwait will apparently be buying billions of dollars' worth of U.S. goods, giving the trade balance a strong, if one-shot, boost.

Cars. The nation's Big Three automakers plan to lay off 29,000 workers this week as they close all or parts of 16 assembly plants. Blessedly, traffic through dealer showrooms has begun to show signs of revival in recent weeks. "It's up 30% to 40%," beams Mark Hutchins, general sales manager for Ford's Lincoln-Mercury Division. "We're ready for things to turn around, and we think they're turning." An unexpected bonanza: Kuwait may need to replace 100,000 cars and trucks in 1991.

Travel. With the cease-fire, tourists have at last begun making reservations rather than having them. The Thomas Cook travel agency recorded a marked increase in new bookings last week. Confidence should rise higher as carriers resume flights they suspended when the crisis escalated. Air France and Lufthansa have announced they are flying to Tel-Aviv again. On Madison Avenue, advertising executives are optimistic that improvement in the travel sector could spark a slow recovery in their industry as well.

Even without this swift victory, the U.S. economy was angled upward. A survey by the National Association of Business Economists conducted last month shows that 73% of the professional business forecasters share President Bush's expectation that the recession will be shorter and less severe than the typical one and should be over by midyear. Some 25% are pessimistic and point to the country's undeniable fundamental ailments -- most notably debt defaults and the bank credit crunch -- as reasons why it will be hard to recover from the downturn. And then there's the war's cost, which White House Budget Director Richard Darman estimates at $40 billion, not counting ground combat. He says the U.S. has offsetting commitments of $53.5 billion from allies, though many in Washington doubt those countries will pay in full.

Against all that, a surge of pride might not be strong enough to move the economy far. "Most Americans feel very good about the war and the fact that the U.S. did something very important," says Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange, "but I don't believe they are going to use those feelings to go out and buy a Cadillac or a washing machine."

Even if consumers don't celebrate the troops' safe return with an assault on local retailers, some analysts see a longer-lasting, if still unquantifiable, benefit from this war. "We built and fought well with some of the most sophisticated instruments ever designed," points out Walter Scott, a professor of management at Northwestern's Kellogg Graduate School of Management. "The biggest dividend at home may be instilling that same kind of aggressiveness into our own business competitiveness. People may be willing to roll up their sleeves and think Japan isn't such an indomitable rival after all."

With reporting by Bernard Baumohl/New York, Gisela Bolte/Washington and William McWhirter/Chicago