From the Streets of Baghdad to Wall Street

President Bush’s foreign policy team is trying to persuade him that he should now turn his attention to Syria. His domestic advisers want him to concentrate on jobs—enough new jobs to ensure that he keeps his own after next year’s election. Right now the president is riding the brilliant American feat of arms in Iraq to a 71 percent approval rating.

But attention is gradually turning away from the mean streets of Baghdad to Wall Street and Main Street. Wall Street has stopped reacting to every battle report from Central Command, and is now focusing on the earnings reports coming from the nation’s boardrooms. And Main Street is refocusing on the indicator that matters most to it: the unemployment rate.

“Uncertainty” is no longer considered an acceptable excuse for the economy’s troubles. Not that the victory of the U.S.-UK-Aussie coalition in Iraq has turned the world into a predictable and pacific place. But Saddam is gone, North Korea has agreed to reconsider its refusal to negotiate an end to its nuclear program, and Syria seems to have a new awareness that its support of terrorism might not be in its interest. In short, those who blamed consumer nervousness, volatility of share prices, and the unwillingness of businessmen to invest on geopolitical events must now take backseats to the hard men who specialize in studying economic indicators.

Among those are Republicans groping for a policy that will get the economy growing at a more rapid rate. According to a Wall Street Journal/NBC poll, 56 percent of the members of the president’s party rate strengthening the economy as Washington’s top priority, more than the 45 percent who believe the War on Terrorism to be the president’s most important job. Republicans are not alone in their view. A majority of Americans now consider the economy “the most important problem” facing America, according to a new Gallup poll, and fewer than half approve of Bush’s handling of the economy. All of which brings shudders to the man who saw his father involuntarily retired from public life after a successful war against Iraq.

But there is no agreement as to how to stimulate growth. The president’s request for a ten-year, $750 billion tax cut has been shot down in the Senate, which is prepared to agree to a package only half that size. Federal Reserve Board chairman Alan Greenspan refuses to cut interest rates despite arguments by economist John Makin and others that his “waiting-game approach to further stimulus is a risky one with a substantial downside.” Greenspan told a Washington audience last week, “We will not know what the full impact of this war will be until it is over.” The economy, he said, “is more prone to economic growth than stagnation.”

Try telling that to America’s manufacturers, who last week released a study showing that manufacturing employment has declined in forty-nine of the nation’s fifty states in recent years, and whose ongoing plight was reflected in a new report by the Fed showing that industrial output fell in March at the fastest rate this year. “Manufacturers in almost every industry simply have no pricing power, and cannot create new jobs until their profit pictures improve,” says Tom Duesterberg, president of the Manufacturers’ Alliance, a trade group.

It is no coincidence that the decline in American manufacturing is moving in parallel with the fastest expansion the Chinese economy has seen in six years. Some of that expansion was due to a spurt in domestic demand for autos, but a good part results from increased exports of goods at prices that American companies find difficult to match. China’s policy of pegging the renminbi to the dollar has prevented American manufacturers from gaining any benefit from the U.S. currency’s decline against other currencies.

The economy’s other woes range from continued excess capacity in many industries, to a further weakening in the jobs market that might drive the unemployment rate above its current 5.8 percent, on to a gaping hole in many companies’ woefully underfunded pension plans and a continued lack of confidence in the integrity of earnings reports.

But the green shoots that are sprouting in America are not only those of the spring foliage for which the nation’s capital is so justly famous. Al Broaddus, president of the Federal Reserve Bank of Virginia, summed up the optimists’ case for reporters. “I think the U.S. economy is on a solid footing for further recovery,” he announced, adding, “I believe successful resolution of the war and reduction of a significant amount of uncertainty is going to be a plus.”

The housing market has been the economy’s principal driver, and is likely to remain a source of strength. The National Association of Home Builders reports that its various indicators of the outlook for new home sales over the next six months indicate further increases in sales. Profit margins for nonfinancial corporations are up, and net cash flow is continuing its two-year rise. Oil prices are down and mortgage refinancings are up, putting more money into consumers’ pockets, which may be why they are showing signs of returning to the shops after a hiatus produced by foul weather in February and a spurt of at-home television-watching in March as the war took center stage.

But a recovery will do the president little good unless it comes by the second quarter of next year at the latest, say his political advisers, and is strong enough to create a significant number of jobs. Although the CEOs of America’s largest companies don’t expect to see a recession, nine out of ten plan either to hold the line on hiring or to cut their workforces over the next six months. That is bad news for Bush, who knows better than anyone that come election year it may once again be “the economy, stupid.”

This column appeared in London’s Sunday Times on April 20, 2003.