War ends but economic battle continues

NOW that the war is over, many US analysts, not to mention the White House, are forecasting that the US economy will rebound in the year ahead. It is widely expected

But how realistic is this assumption? In a survey published last week by the US "Business Roundtable" group (roughly equivalent to our own IBEC), the chief executive officers of 250 of America's top companies warned that an end to the war in Iraq won't necessarily mean a quick rebound for the economy.

Stating that inventories are still too high, capacity too great and orders too slow for them to be optimistic, they said "nobody is basing any of their investment decisions on growth at this point. These kind of business conditions are going to continue on, war or no war". When asked to place a number on their analysis, the Business Roundtable forecast Gross Domestic Product (GDP) economic growth of 2.2% in the US this year down from 2.4% in 2002.

Given that many businesses in the US are still burdened with high debt levels and weak demand, it would be overly optimistic to assume that capital spending is set to resume now, just because the war is over.

In fact, the war and the preceding war on terror provided a convenient smokescreen that masked the lack of corporate investment activity in the US over the past 12 months. And analysing specific sectors of the US economy offers plenty of support to reinforce the forecasts of the Business Roundtable.

Certain sectors of the US economy, which played a significant role in driving the bull market of the late '90s, are enduring particularly difficult trading conditions. Airlines, for example, are suffering from falling demand and rising fuel costs. Car manufacturers continue to offer zero-cost financing and discounting heavily in an effort to dispose of inventories.

Aircraft manufacturers (with the exclusion of defence contracts) are also faced with declining orders. And the information and telecoms sectors remain burdened with massive levels of debt, assumed while pursuing expansion plans during the boom.

However, there are sectors of the US economy that should record growth this year. Defence obviously will have healthy order books and no problems with excess inventories.

The housing sector in the US (fuelled by the lowest mortgage rates in living memory) should perform well. Retailers should also be well positioned to take advantage of any upturn in consumer confidence. They seldom have problems with excess inventories and have low debt levels thanks to several years of growth.

So now that the fog of war has lifted, our view of the US economy is clearer. As highlighted by the chief executive officer survey detailed above, America will see growth this year, but strong economic growth isn't guaranteed.

Until the problems of over-capacity, high debt and weak demand are overcome, growth will remain weak, and so too will the dollar.

Poor earnings from corporates also mean rapid rallies in the Dow are now a thing of the past. Recession will be avoided but, at best, below trend growth can be expected.

*Niall Dunne, Ulster Bank.