Wartime Recession?

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One industry that always gets a lift from war is the defense sector, and weapons contractors such as Raytheon and Northrop Grumman were among the few bright spots on Wall Street last week, with the sector shooting up a collective 37%. But investors may be assuming a bit too much. While the defense budget is now expected to rise from $316 billion this year to as much as $400 billion next year, the higher figure will still represent less than 4% of GDP--as compared with the 38% the U.S. spent in 1944.

The government will plow more funds into precision-guided munitions, sophisticated communications and surveillance systems, and unmanned aerial vehicles, but "it's not clear this is going to be a Reagan-era buildup," warns Michael Vickers of the Center for Strategic and Budgetary Assessments.

Weapons makers weren't the only winners on Wall Street last week. Web and video-conferencing companies such as WebEx, Polycom and Raindance, expecting order books of potential new customers wary of employee travel, briefly became investor darlings. Cell-phone companies such as Nokia and Verizon also benefited from the wireless industry's sudden image overhaul; no longer the objects of universal derision, cell phones are now seen, even by Luddites, as essential tools in case of emergency.

An emergency is just what last week felt like for investors. Baby boomers who were counting their nest eggs before they hatched may have to rethink their early-retirement plans; a diversified 401(k) that tracks the S&P 500, for instance, lost nearly 12% last week alone--and has lost 33% in the past 12 months. "This is not the time to be gambling with your life savings," says financial planner Robert Wacker, of San Luis Obispo, Calif., who like many Americans shifted more of his portfolio--perhaps a bit late--into the relative safety of bonds.

Still, even in the middle of the current economic doldrums, many Americans are trying, as they are wont to do, to look at the bright side. "I was chairman for two days, and then I had jets with my engines hit a building I insured, which was covered by a network I owned, and we are still growing 2001 earnings by 11%," General Electric's new chairman, Jeffrey Immelt, told an analyst meeting in New York City on Friday, after he slightly pared the company's growth outlook. "I think we're in pretty good shape. We're looking at this unmistakable tragedy as a time of strength for the company." In the next few months, Americans will learn whether the same can be said for the economy.