Peace And Prosperity?

"The war is over," the conductor of a New Jersey commuter train announced to startled passengers Friday morning. But the euphoria turned to skepticism once the traders and money managers reached their offices on Wall Street and got the details of Iraq's plan for peace. "There was an initial elation after the announcement," says Merrill Lichtenfeld, a broker with Montgomery Securities in New York. "Then, we all realized that there is nothing really new here." After an opening flurry, stock trading was quiet until the afternoon, when computerized program trading pushed the market sharply higher. Things were even less dramatic at the nearby New York Mercantile Exchange, where oil for March delivery fell modestly.

The prospect of peace alone won't be enough to keep the current bull market going. Nor will it restart the U.S. economy, which continues to decline at a rapid clip. Retail sales in January were 1.4 percent lower than the same month a year ago, while industrial production fell for the fourth consecutive month. Some economists see light at the end of the tunnel, but the recession's end is several months away at best. Says Paul Boltz, economist for the T. Rowe Price mutual funds, "Saddam Hussein may have started it, but rising unemployment and declining personal income are keeping it going."

A quick end to the war would undoubtedly give a boost to consumer confidence, which is at its lowest level in a decade. Oil prices could drop $2 or more a barrel from the current $20.88, predicts George Benedict, an oil-futures trader with Refco Securities, Inc. But Americans have already enjoyed a 43 percent fall in oil prices since their October peak. The price reductions that lie ahead are small by comparison. They probably will not be enough to trigger a spending boom by consumers worried about keeping their jobs and paying their debts.

President Bush's Council of Economic Advisers predicted last week that the economy will grow only by 0.9 percent in 1991, even with a quick end to the war. The population has been growing at a slightly faster rate, so income per person is likely to fall for the second year in a row. Despite falling interest rates, business investment won't pick up until borrowing is even less costly.

Abroad, declining economic growth will keep the export sector from leading a recovery. Exports have been a driving force behind the U.S. economy since 1988 (chart). American farms, factories and mines shipped $394 billion worth of goods abroad in 1990, up from $250 billion in 1987. That heady growth is unlikely to continue. "We have got more of a slowdown than expected, and that is going to have an effect on U.S. exports," says Stephen Marris, a Paris-based fellow of the Institute for International Economics. At most, projects Bush economic adviser John Taylor, foreign sales will add 0.5 percent to U.S. output this year.

U.S. industry is already feeling the changed climate abroad. "You've got to go out and get new customers to grow in 1991," says Peter Ashton, who runs Timken Co.'s bearings business. "If you just rely on doing in 1991 what you did in 1990, I suspect sales on exports would be down." A survey last month by the National Association of Business Economists found that one third of exporters had rising foreign sales while one fifth reported declines. Six months earlier, not a single company surveyed reported a drop in exports. "The general industrial markets are being hit," agrees J. Michael Hagan, president of California-based Furon Co., which exported 17 percent of its $330 million in sales last year. At Allen-Bradley Co., which manufactures electronic controls, senior vice president William Fletcher scoffs at the notion that exports might carry the economy one more year. "I don't know where people think these exports are going to go, " he says. "The only thing I could see in the next six months might be rebuilding Kuwait."