GDP's fortunes tied to war

However, the financial consulting company said the taking of Baghdad by U.S. troops today as the war entered its third week indicates the war will last less than two months. And that means the group is sticking to its baseline forecast of a 2.6% GDP growth this year.

Global Insight's 2003 baseline forecast also predicts growth of 1.7% in the U.S. manufacturing sector. With a long war, a reduction of 0.5% could be expected, extending the manufacturing sector's recession for a third year.

The uncertainty of the conflict's length and the consequences for international relations have increased volatility in the financial markets and dimmed consumers' perception of the future, Global Insight said. The company's economists said the greatest impact of a longer war would be seen in U.S. consumer spending, which has been strong for the previous 18 months and rose 3.1% in 2002.

Before the war, an increase of 2.4% in the 2003 GDP was forecast. However, in the long war scenario, depressed consumer confidence and continuing uncertainty in the job market could limit that gain to only 0.5%.

Global Insight said this would have a tremendous effect on consumer manufacturing and services industries, as durable goods sales would decline.