IRAQ, IRAQ, IRAQ! That’s all you heard about when the World Economic Forum began this year in Davos, the quaint Swiss skiing village that hosts 2,000 world leaders each year. The only thing worse than hearing this banter was being an American and having to listen to speaker after speaker tell us how miserable we are.
Fortunately, U.S. Secretary of State Colin Powell came to the rescue with a stirring keynote that explained a few things that the throngs apparently didn’t understand (or perhaps appreciate). “This is not about inspectors finding smoking guns. It is about Iraq’s failure to tell the inspectors where to find its weapons of mass destruction,” said Mr. Powell, as he laid out America’s case for war. “It is our hope, however–it is our will–that we can do this peacefully. It is our hope that Iraq would participate in its disarmament. If it does not, it is also our hope that the international community will stand behind the elements of [United Nations Security Council resolution] 1441, and as a great coalition, we will deal with this problem once and for all,” he concluded to an audience that had become more receptive by the end of his speech.
But enough about war, and on to the real business of Red Herring: what were these same world leaders saying about the prospects for the U.S. economy in 2003?
After triangulating all that we heard in Davos, we conclude that the U.S. economy will grow around 3 percent in 2003. And, taking another stab at it, we would say that the Nasdaq will top 1,800 by the end of the year. How’s that for specificity? Of course, no one really knows.
In the short term, as the possibility of war with Iraq drags on, so will the anxious business and consumer psychology. Pumped up by the backing of 20 countries, President George W. Bush has implied that we are looking at a mid-February go-to-war date. Also on hand at Davos were Bill Clinton and Shimon Peres, who said that if war does happen, it should be a quick one. “If [British Prime Minister Neville] Chamberlain had moved more quickly to declare war on Germany in World War II, we could have saved millions of lives,” said Mr. Peres.
Assuming a brief conflict, the next war Mr. Bush has to fight will be passing his whopping tax cut. U.S. Secretary of Commerce Don Evans was at the World Economic Forum to explain that Mr. Bush’s current economic package is designed less as a short-term stimulus than as an effort to change the federal government’s long-term approach to be more “pro-growth and pro-entrepreneurial.” He said, “We need to cut taxes to get money back in the hands of people who will spend it more efficiently, and cut our expenses, which have been growing well ahead of inflation.”
During the ’90s boom, everybody was spending ahead of inflation, assuming things would continue to go up, up, up. But most of us got caught–even the smart guys–and unfortunately had to cut, cut, cut. So why should the government be any different? We wish the Bush administration luck in trying to change the spending culture in Washington, D.C. State governments must also learn how to do more with less.
So our cautious optimism is built upon the hope that the war issue will be over by June, that some decent version of the Bush economic plan will get passed into law, and that business and IT spending will pick up again. So how could that last hope happen?
John Chambers, the president and CEO of Cisco Systems, explained in Davos that the productivity benefits associated with the technology investments of the past four years would begin to be realized this year, which could encourage another round of IT spending. But he also cautioned that risk/reward factors are now at their most conservative levels than at any other time in his career. In other words, CEOs are only going to buy stuff when they really need it. Mr. Chambers’s other concern is that consumer confidence, which has remained strong, will weaken before business spending picks up again. We have that concern as well.
American business leaders also fretted that the United States can no longer carry the world economically and that other countries need to pursue pro-growth policies as well. You could also feel a definite shift in market interest, as most U.S. companies talked about expanding their businesses into developing markets, particularly China. The most talked-about statistic–most symbolic of the “new China”–was that the Chinese were buying 5 million cell phones a month.
“Given all we lived through in the last two years, it is pretty impressive that the economy has grown 3 percent in the last 12 months,” noted Mr. Evans. And we think that, barring any major surprises, this year will end up pretty much the same. The bad news with this scenario, however, is that the United States will probably not re-create many of the 1.5 million jobs lost since the Internet bubble burst. That will be the economy’s job in 2004.