BofA economist gives WesCorp conference attendees the economic effects of war

LAS VEGAS – Speaking at WesCorp’s Credit Union Outlook 2003 conference, Bank of America Chief Economist Dr. Mickey Levy told attendees that U.S. actually gets very little oil from Iraq, and if the countries go to war the economic impact will be minimal. He did say that if the war spreads in the Middle East economic problems could occur, and the worst case would be if a war generates more terrorist attacks on U.S. soil. “It will hit the stock market and the bond market and we would get some further hit to consumption and business investment,” said Levy. Levy said interest rates should begin to rise next Spring, but said there are so many variables to consider these days. As for today’s economy, he characterizes the present state of the business community and capital spending as being in a kind of hangover from the late 1990s. “The question we have to ask is how much further adjustment needs to occur in the capital stock. That is, how long will capital spending have to fall to adjust? There’s still uncertainty in the business environment. I’m not looking for a double-dip recession. But I am looking for softness in the rate of economic growth at least in the fourth quarter and first quarter. Then next spring, I think the economy will reaccelerate and start to actually feel better.” Feeling better might not last. The economy could experience a relapse if certain conditions arise during America’s possible war with Iraq. “The economic and financial impact of a U.S./Iraq war depends crucially on oil prices and the depth and breath of the conflict.” He said the conflict in Kuwait in 1990 must be considered in all this and that the economic situation now is very different from what it was in 1990. “In the summer of `90 when Iraq invaded Kuwait, monetary policy was tight. The Fed had the funds rated at 8.2%. Three months later, President Bush, Sr. enacted a very untimely tax hike. So we had tight monetary and fiscal policies. The banking system was in terrible shape. It was extremely fragile and under-capitalized. And then, oil prices spiked from $20 to $40 a barrel but people perceived it as temporary.” He says today’s economy is also in a much lower rate environment and the financial services sector is strong.