The crisis in the Persian Gulf threatens to cut the American economy's already sputtering growth rate in half, bringing it "closer to zero," Treasury Secretary Nicholas F. Brady said in an interview Friday, but administration forecasts circulating privately say that a recession is all but inevitable.
The grim economic outlook is a reminder of the toll that the Persian Gulf crisis is likely to take in the United States, despite the ability of the Bush administration so far to rally allies around a military response and economic sanctions against Iraq.
Brady made his comments amid rising concern over the potential impact of higher oil prices on a weak economy. The country already has been wrestling with the rising price tag of the savings and loan cleanup, a deep economic slump in New England and signs of trouble in some commercial banks. Now, the Persian Gulf crisis has made the nation's economy suddenly seem fragile.
On Friday, Brady nevertheless played down the economy's weakness, saying that although the growth of the economy was "less than we forecast or what our best hopes should be ... I should point out that it is still a rate of growth." He said that the economy is "resilient" and cautioned against predicting a recession.
Brady's hopeful outlook is based in part on the view that it is possible that the situation could return to normal in six months and that inventories of oil are at the highest levels in nine years, an official said.
But Brady conceded that higher oil prices still could boost inflation by half a percentage point and shave more than half a point off the economic growth rate -- enough to bring it close to zero.
Private assessments circulating within the Bush administration take an even dimmer view, because in contrast to Brady's public position, they assume the economy already has reached the point of no growth and any further slowdown will push the country into negative figures. They agree with the forecasts made by prominent outside economists that a recession is all but inevitable, even if oil prices stabilize about where they are now. Government figures also suggest that each $5 crude oil increase represents a worsening of the annual trade deficit to the tune of $15 billion.
"We are right in the zone of no growth," said a government official. "As to an actual recession, we won't know for a while. ... " The latest GNP report, for the second quarter, showed economic growth down to an annual rate of 1.2 percent. But in all likelihood, according to sources, that will be revised downward because of economic softness that was gathering momentum even before the Persian Gulf crisis.
Charles Schultze of the Brookings Institution, a former budget director, said "we have been pushed over into a recession by the oil shock." The nation's output, he said, likely will show a 1.2 percent decline. He based his calculation on the fact that oil prices already have gone up $11, from a $17 base to $28 per barrel. He said that gross national product growth was essentially zero when the Persian Gulf crisis erupted.
For all the severity of the initial impact on the economy, Brady made it clear Friday that in the administration's deliberations over how to respond to the Iraqi invasion of Kuwait there was a feeling that failure to act quickly and forcefully would have invited a greater economic threat.
Most Americans, he said, would understand the need to intervene in the Gulf, even if it proves costly.
"If you ask the average American, he will understand right away the economics of this situation," Brady said. "Placing so much control of so much of the world's oil production in the hands of a man who is bent on military solutions to the world's problems is a very dangerous thing."
The administration already has its hands tied in how it can deal with the impact of higher oil prices because of the size of the federal deficit.
"Events in the Middle East call attention to the fact that when you are operating an economy, a company or a personal checkbook with too much debt you place yourself in the position that is less strong than you would want it to be," Brady said.
The economic fallout of the confrontation with Iraq should only increase the urgency of shrinking the budget deficit when talks between the White House and Congress resume in September, Brady said. He complained that the Democrats were stalling and said that their contribution to the budget summit, especially since President Bush compromised his "no new taxes" pledge, had been "very disappointing."
Government economists agree that the economic downturn is not likely to be as bad as it was during the last oil shock in 1979, unless the price moves into the range of $35 to $40 per barrel. And that level won't be reached, most agree, unless there is no replacement, through increased Saudi production or other sources, of at least a share of the estimated 4.5 million barrels a day in lost Iraqi and Kuwaiti production.
Bush administration officials tentatively have decided that even if prices were to go up to $35 to $40 a barrel, they will not repeat what they consider to be a basic mistake of the last oil shock, when an attempt was made to control oil prices. That was the genesis, they believe, of the painful customer queues at service stations.
But one idea being debated is a subsidy, or cash allowance, for low-income people who could not afford skyrocketing gasoline prices.
Government officials take a pessimistic view of the prospects for further reducing oil consumption significantly through conservation measures, believing, as one official put it, that "most of the easy things have already been done."
Brady based his relatively optimistic assessment of the economic impact of the Persian Gulf crisis on an oil price increase of $5 per barrel. The starting point taken was $19 per barrel, sources said, the price just before the last meeting of the Organization of Petroleum Exporting Countries.
At that OPEC summit, Iraqi leader Saddam Hussein demanded and won an increase in price to about $21 a barrel. The OPEC marker price, however, had been down to $16 as recently as June, and as low as $14 in the spring.
A $5-a-barrel price increase in crude oil would translate into an approximately 12 cent a gallon increase in retail gasoline prices. "That's about four-tenths of 1 percent to five-tenths of 1 percent in the level of the Consumer Price Index," a government official said. "And if you sustain that a year, then that bleeds into higher clothing prices, airline tickets, and other forms of transportation of another four- to five-tenths, so you're talking about eight-tenths to 1 percent" increase in consumer prices.
Former State Department economics official Robert Hormats, now a Goldman Sachs & Co. vice president, said that higher oil prices cannot be passed along to the consumer as easily as in the past, because the economy is so soft.
"The best course for the Federal Reserve is to recognize that the inflationary threat is less than the recessionary threat, and therefore loosen up on interest rates," Hormats said.
That, of course, is the path that Brady and the White House have been urging on Federal Reserve Board Chairman Alan Greenspan for the past several months.
On Friday, Brady reiterated earlier calls for the Federal Reserve to lower interest rates. "We place a higher premium on growth than we do on a worry about inflation. And in fact it seems to us that many of the statistics that bear on inflation would lead us to think that inflation has subsided," Brady said.
Moreover, the Treasury secretary added, inflation has been highes t in the service sector of the economy.
"The monetary tools to drive inflation out of the service sector of the economy are very very blunt" and "have an exaggerated effect on the other parts of the economy," Brady said.
Greenspan, however, has kept his own counsel, still giving equal attention to the threat of inflation.