By John Byczkowski
The Cincinnati Enquirer

The uncertainty preceding the war with Iraq has been bad for the U.S. economy - so bad, in fact, that it caused the Federal Reserve to do something this week it had never done before.

It shrugged.

Every Federal Reserve meeting ends with a statement about what is happening with interest rates, and which way it thinks the economy is headed. Tuesday's meeting ended with no action on interest rates, and a statement that, given "the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making," the Fed simply couldn't say where the economy goes from here.

"Strange" is what Gregory Hess, an economist at Claremont McKenna College in California, called it. "They should have said more."

What could the Fed have said? There's almost no consensus among economists about what comes next. They agree that the economy will be different now that the bombs have started falling. But will it be better or worse? Opinions differ.

Lynn Franco of the Conference Board said now the focus will turn to the three most important factors in the economy: "Jobs, jobs, jobs." Anirvan Banerji of the Economy Cycle Research Institute said the economy is at a "tipping point," and what happens next depends on the direction of oil prices. Ed McKelvey of Goldman Sachs said consumers need to save more money to make up for three years of poor returns on their investments, and that process will continue to be a drag on the economy.

A short-term bounce in the economy is likely, and may have already begun. Oil prices are down almost $10 a barrel, near $28, over the past seven trading days. The Dow Jones Industrial Average is up 770 points, or more than 10 percent, over the same period.

Some of that bounce comes off bad weather in February, which delayed some spending. The "CNN effect" - consumers glued to their televisions - may delay the economy's comeback further, said Randall Moore, editor of Blue Chip Indicators, a newsletter that surveys 53 economists each month.

Most economists in his survey see a stronger growth in the second half of the year. But, "there's a group out there - a not-insignificant group - who believe there will be considerable headwinds to stronger economic growth, even if the war is short and quick," he said.

"Consumer fundamentals are not the greatest in the world, because unemployment continues to creep up higher, job growth is essentially nonexistent, salary and wage growth have slowed significantly over the past two years and it's probably not going to pick up any time soon,'' Moore said. "Because of all the uncertainty about jobs, war, etc., consumers have shown a preference to boost their savings rate, and that can only be done at the expense of spending." And that's a recipe for a slow economy.

Franco, who tracks consumer confidence for the Conference Board, said the availability of jobs is a big concern for consumers. The jobless rate was 5.8 percent in February, up from 4.2 percent when the recession began in March 2001.

If the war is quick - as it was in 1991 - consumer confidence should jump, she said. But the rise in 1991 was unsustainable because the job market remained listless, she said, and didn't pick up steam until 1993.

This time, if the war is short, "you'll get a temporary boost (in confidence), but whether or not it's sustainable depends on labor market conditions," she said.

Among economists interviewed by the Enquirer, Banerji appears most in agreement with the Fed. He said the economy could go either way - into more rapid growth or back into recession.

The economy, he said, has been in a "sub-par recovery." Though GDP has grown 2.9 percent over the last 12 months, the jobless rate is 5.8 percent, exactly where it was 14 months earlier.

"We could be tipped (into recession) if oil prices go up substantially because of various reasons, and at the same time the war goes badly and we have a terrorist attack,'' he said.

"But we could go the other way. If oil prices fall, if the war is over quickly and decisively as most people expect, if there are no major terrorist attacks here ... then you could have some restoration of confidence, certainly a huge reduction of uncertainty and a boost from lower oil prices. The combination is probably enough to give us stronger growth than we've had lately."

James Coons, an economic consultant in Columbus, agreed that oil prices are important to stronger growth. "Should the price of oil continue to move down into the 20s (less than $30 per barrel), I think things will start clicking and we'll actually see growth pick up in the second half." He expects 200,000 new jobs to be created each month in the second half of the year.

McKelvey, at Goldman Sachs, said the key issue for the economy hasn't been the war. That doesn't mean it hasn't been an issue. The bombing might bring some "clarity" to the economy and produce a short-term bounce, he said.

"But after that, I think we continue to have a below-trend growth rate, because consumers are in a process of trying to lift their saving rate, and to do so essentially applies a drag on growth, and perhaps even a significant drag," McKelvey said.

Consumers adjust their savings based on how well their investments are doing. In the late 1990s, when the stock market was booming, consumers saved less because their investments were growing so rapidly, McKelvey said.

Since the stock market bust in 2000, consumers have brought their savings up slowly. Americans were saving 4.3 percent of their income at the end of 2002, but that's far from where Goldman Sachs thinks it needs to be - in the range of 6 percent to 10 percent.

"That is the underlying issue for growth," McKelvey said. Consumers "really haven't gone back to where they need to go to meet net-worth objectives. So saving is probably on its way up, and as consumers do that, it's a drain on the economy."

E-mail johnb@enquirer.com