Prospects for the U.S. economy look increasingly uncertain, and not only for cyclical reasons. Although third-quarter GDP increased at an annual rate of over 3 percent, posting four straight quarters of expansion, there are signs that consumers are beginning to tighten their purse strings. In October, unemployment increased while auto sales fell markedly. In a move to boost consumer and business confidence, the Federal Reserve last week cut the benchmark federal-funds rate by half a percentage point to a 41-year low of 1.25 percent.
However, boosting confidence in an economy overshadowed by fears of war will be difficult. President George W. Bush, his hand strengthened by a Republican victory in the midterm elections, appears ever more determined to strike against Iraq. The United States is now backed by a new U.N. Security Council resolution requiring Baghdad to disarm — a de facto ultimatum that could lead to military action if it fails to comply. The Iraqi agreement to allow U.N. inspectors back into that country, as it stands, falls short of satisfying Washington.
The economic risks of war are certainly not lost on the Federal Reserve. In a statement, it said, "incoming data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," although lower interest rates, coupled with productivity gains, are "providing ongoing support to economic activity."