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"It's the economy, stupid."

Most Americans remember that rallying cry from Bill Clinton's first presidential campaign after Gulf War I. It's time to dust it off.

Here we are, 12 years later, after another successful fight in Iraq, and you'd expect to find the good war news reflected in the financial markets. But no.

Sure, the Standard & Poor's 500 closed last week 8.6 percent above its low point March 11, 10 days before the war began. But the gains are no more than a recovery from the slump right before the fighting started, and the gains seem to have stopped coming. Stock prices have been flat through April. Most important: Stocks are lower today than they were from mid-October through mid-January. It looks like investors have got all that they're going to get out of this victory.

So what's the problem?

Basically, all the things that were wrong before war became an issue are still wrong. Unemployment is high, with 465,000 more jobs lost over the past two months. Corporate earnings are disappointing; companies have yet to crank up the spending needed to spur growth.

A Bloomberg News survey of corporate executives last week found a depressing consensus: that an end to the war would not lead to a quick economic recovery.

And a survey released recently by the Business Roundtable, comprised of chief executives of 150 large corporations, found that only 19 percent expect their capital expenditures to be higher over the next six months than over the past six months. On a variety of economic issues, the executives were gloomier than they were in last November's survey.

On average, they expected gross domestic product to grow at a lackluster rate of 2.2 percent over the next six months. That's lower than in 2002.

There are some positive signs. The government reported retail sales had jumped a surprising 2.1 percent in March, while the University of Michigan said consumer confidence has jumped this month to its highest level since December. Also, many experts now think oil prices will stabilize in the mid-$20-per-barrel range, well below the near $40 level of only a few weeks ago.

If consumers think things will get better, they may spend more, helping to improve corporate profits and thus pushing up stock prices. And if companies that tightened belts to prepare for high fuel prices now reverse course, perhaps they'll start spending and hire more workers.Get yourself in a positive enough frame of mind and you can visualize a benevolent spiral, with economic improvements, rising stock prices and brightening consumer and corporate confidence all feeding one another.

But look closely at the recent comments from economists and stock-market analysts and you're left shaking your head. The optimists seem to be pinning their hopes on the same things they've been talking about for years: that low interest rates, for example, will keep the mortgage refinancing boom alive, continuing to give homeowners lower mortgage payments that will leave them with more spending money.

Certainly, cash freed up by refinancings helped keep the economy from an even deeper slump over the past couple of years. But how long can this go on? Won't there come a point when most people have refinanced already? Won't people realize that any extra cash they generate this way needs to be saved, not spent?

For the economy and stock market to enjoy a significant turnaround in the near term, something has to change dramatically. But at the moment, it's hard to imagine what that could possibly be.

The Federal Reserve could cut interest rates, yet again. But short-term rates are already at an astonishing low of 1.25 percent. It's hard to imagine even a cut to zero would have much effect.

Interest-rate cuts are mainly designed to encourage corporate borrowing, so companies can spend. But many companies still have more production capacity than they need, thanks to their spending binge of the late '90s. They forgo borrowing and spending because they don't need to, not because interest rates are too high.

If the Fed can't stimulate the economy through monetary policy, what about fiscal policy — government spending and tax cuts?

Even as proposed, President Bush's tax cuts offered a long-term tax reform, not the short-term jolt the economy needs. Of course, the Senate recently cut the president's proposal in half, slashing whatever near-term stimulus the package would have offered.

With the federal budget deficit mounting, it's hard to imagine any dramatic new government spending.

Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at

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