Washington, March 24 (Bloomberg) -- The war with Iraq will slow, not derail, U.S. economic growth this year because consumers have reined in spending and companies have delayed investing and hiring, economists said in a Bloomberg News survey. ``With uncertainties about the outlook rising, companies have been reluctant to take any kind of risk in terms of major spending or significant hiring,'' said Peter Hooper, chief economist at Deutsche Bank Securities in New York. ``That will change.'' The economy will expand 2.5 percent this year, down 0.3 percentage point from December's forecast of 2.8 percent, according to the median of 71 economists surveyed by Bloomberg News last week. Projections ranged from a high of 4.2 percent to a low of 1.4 percent. The economy grew 2.4 percent in 2002.
Concern about whether an Iraq war would hamper oil supplies, already disrupted by strikes in Venezuela, helped push oil prices to a 12-year high on March 12. Since then, oil futures for May delivery have dropped 29 percent to a three-month low and stock values have turned positive for the year. That fuels expectations that growth will accelerate in the year's final six months. ``War uncertainties lingered on for a good deal longer than we thought,'' said Hooper, whose GDP forecast matched the median both this quarter and last. ``The jump in energy prices was much more than expected and clearly was a drag on the consumer. By the time we get to the end of this year, the economy will feel much stronger than it did at the end of last year.'' U.S. financial markets show investors are betting on a quick resolution to the war. The Dow Jones Industrial Average rose 8.4 percent last week, its biggest weekly gain since October 1982.
Slow Growth at First
Forecasts for the first six months of the year were most affected by concerns about the war. The economy is forecast to grow at a 2 percent annual pace this quarter, down a half-point from the December survey. Economists lowered their media forecast for the April-to-June quarter to a 2.2 percent annual pace from 3 percent, The economy will then accelerate to a 3.5 percent pace from July to September and a 3.8 percent rate in the final three months of the year, according to the survey. The fourth-quarter forecast is just 0.1 point less than in the December poll. The difference between the most optimistic and pessimistic forecasts revolves around expectations for consumer spending, which accounts for more than two-thirds of the economy. ``We should see the consumer start to snap back toward the beginning of summer'' once military tensions ease and oil prices fall, said Joe Liro, chief economist at Stone & McCarthy Research Associates in Princeton, New Jersey. Business investment will follow, Liro said. His 4.1 percent growth forecast is the poll's second strongest.
Consumers' Cocoons
Economists at the other end of the spectrum aren't as sanguine about consumer or business demand. ``Consumers are going to cocoon themselves at home so that spending will be down,'' said Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center, whose projection of 1.4 percent growth trailed all estimates. ``That is going to wreck the second quarter.'' Dhawan expects the economy will grow just 0.3 percent from April to June. A quick end to the war with Iraq won't be a panacea for lackluster business spending, said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York, who pegs growth at 1.9 percent this year. The issue of sagging business confidence ``is not necessarily a reflection of uncertainties about Iraq as much as it's uncertainties about the sustainability of consumer demand and about issues of corporate accountability and SEC scrutiny,'' said Abate. ``These are issues that are not necessarily going to change with a resolution of the Iraq situation.''
Employment Rate
Employment won't improve this year, the survey found. The unemployment rate will probably average 5.9 percent, up from 5.8 percent last year. The rate would peak at an average of 6 percent in the second quarter, then fall to an average 5.8 percent in the final three months. An economic rebound that is slow to materialize and a weak job market will keep Federal Reserve policy makers on the sidelines for the next three months, the survey showed. Central bankers will hold the target for the overnight bank lending rate at 1.25 percent, a 41-year low, through the third quarter, the survey said. The rate would finish 2003 at 1.5 percent. Policy makers last week surprised investors by saying the looming war with Iraq made it impossible to assess the outlook for the economy. Inflation, as measured by the consumer price index, is projected to rise by 2.4 percent year, matching the increase in 2002, the survey said. Consumer prices were up 3 percent in the 12 months ended February, the Commerce Department said Friday.//www.quote.bloomberg.com