War—A Market Boon or Bust?

The uncertainty in the weeks preceding the war in Iraq was reflected in the stock market.

Today, that uncertainty of its start has vanished, and the question now is when the war will end. While no one knows the answer, the Portland Cement Assn. (PCA) is projecting the economic impacts of what a shorter vs. longer conflict may do to the U.S. construction outlook.

In its quick war scenario, the association predicts stronger economic recovery may occur as early as May, opposed to summer's end. This, of course, is predicated on the notion that fighting will be over in a matter of weeks, with low casualties and no complicating issues, such as hostilities between Turkey and Iraqi Kurds.

Even with this rosy forecast, PCA says low economic activity is still to be expected, with consumers staying at home during wartime. When the fighting stops, PCA predicts a month-long transition in which consumers will assess their finances before spending again. This should trigger an improvement in manufacturing activity. As uncertainty about the economy dwindles, investors will be more eager to put their money into the market, hiring should start again, and jobs should be created on a more than 100,000-per-month basis.

However, PCA notes its report does not necessarily indicate growth in construction spending. The key areas of nonresidential activity, it says, require long lag times between an upswing in economic activity and an increase in construction activity. Retail construction, however, should increase due to shorter lag times, and industrial construction may also increase slightly. Public construction is expected to stay the same. Overall, nonresidential construction will decline, and residential construction will remain weak. The long-term outlook is better, anticipating that the economic growth of 2003 will prompt a stronger recovery for these markets in 2004.

PCA's second scenario paints a darker picture. It assumes the American public will see military casualty rates higher than acceptable, triggering a consumer-led recession. This spending downturn will slow investment and manufacturing spending. This scenario could prompt a recession that requires a full year for the economy to return to where it's at today.