In addition to being hellish, war is also unpredictable, devastating and catastrophic to those caught in its grip. This week, war was "good" for the stock market, which rose despite a string of desultory economic reports and ongoing uncertainty about "regime change" in Iraq.

Somewhat counterintuitively, the war also has caused a reduction in "risk premiums" in the financial markets, observed Wachovia's economics group. Double-B rated corporate bond yields and oil prices have fallen sharply since the war started (along with gold prices), while Treasury yields have risen "as the flight-to-safety premium begins to disappear as the war news has become more positive," commented chief economist John Silvia.

Those trends resumed this week, albeit in muted form vs. some recent wild swings.

Thanks largely to a big war-related rally on Wednesday, the

Dow Jones Industrial Average

rose 1.6% for the week, while the

S&P 500

gained 1.8% and the

Nasdaq Composite

climbed 1%.

Meanwhile, 10-year Treasury yields rose 4 basis points to 3.94% for the week, oil prices fell 5.1% to $28.62 and gold slid 1.4% to $326 per ounce.

All other factors seemingly took a back seat to the war news. The midweek rally in shares and the dollar was inspired mainly by news of allied forces breaking through Republican Guard forces at Karbala and other key stopping points on the road to Baghdad. Conversely, the enthusiasm was more restrained late in the week as traders contemplated a potentially bloody urban battle for the Iraqi capital. (This column examined the potential

troubling aftermath in postwar Iraq.)

On Friday, the Dow rose 0.5% and the S&P 500 added 0.2%, despite footage suggesting Saddam Hussein survived the opening salvo of the war and a warning by Iraqi Information Minister that Iraq would use "nonconventional acts" against allied forces. The Dow also overcame another setback for

Altria Group

(MO) - Get Report

, which fell nearly 12% for the week.

The Comp, meanwhile, shed 0.9% Friday, its relative weakness stemming from a slew of profit warnings by firms such as

PeopleSoft

(PSFT)

,

Affymetrix

(AFFX)

and

STMicroelectronics

(STM) - Get Report

, which rippled through the chip sector. The Philadelphia Stock Exchange Semiconductor Index fell 2.5% Friday, but was essentially flat for the week.

"As the conflict gets closer to resolution, markets will look to the state of the economy and corporate earnings for evaluating equity investments," wrote Wachovia's Gina Martin. (After the bell Friday,

Siebel Systems

TST Recommends

(SEBL)

joined the warning parade.)

It's (Still) the Economy

It was overshadowed by the war news but the state of the U.S. economy was definitely a focus this week, with the data overwhelmingly disappointing.

Among other disappointing reports, the Institute for Supply Management's indices showed contraction in both the manufacturing and services sectors. On Friday, the government reported nonfarm payrolls fell by 108,000 in March, more than double consensus estimates, while February's loss was widened to 357,000. The unemployment rate unexpectedly held steady at 5.8% last month, but the pool of workers included in the survey fell by 64,000, as more Americans who want jobs aren't actively looking.

Even before the jobs report, a number of economists were talking about the economy already being in contraction. Whether such a setback qualifies as a "double dip" or a new recession is a matter of semantics, but the message was unmistakable: The economy is sucking wind.

"A global double dip may now be at hand," Stephen Roach, chief global economist at Morgan Stanley, commented Friday, upping the ante on those worried solely about the U.S. "War, uncertainty and disease are a tough combination for any economy. But for an unbalanced and vulnerable world, this confluence of shocks hurts all the more."

While most Americans are focused on the war, Asia is reeling from the SARS virus, which has "brought tourism, travel and entertainment to a virtual standstill in this once-resilient region," Roach wrote.

Roach forecast global GDP will be flat or "slightly negative" in the second quarter and cut his 2003 forecast to 2.4%, below the "official recession threshold" of 2.5%. "I maintain the view that there could well be more to come on the downside of our revised global prognosis," he wrote.

The Morgan economist wasn't the only one warning about flagging growth this week. David Rosenberg, Merrill Lynch chief North American economist, said his "below-consensus" U.S. growth estimates of 1% for the first quarter and 1.8% for the second quarter "may not be tepid enough."

Meanwhile, the ISI Group cut its first-quarter GDP estimate to 1.5% from 2% and its second-quarter estimate to 2% from 3%. More cuts may be forthcoming following the March employment report.

In contrast to the prevailing "gloom and doom" about the U.S. economy, specifically, Anirvan Banerji, director of research at the Economic Cycle Research Institute and occasional

RealMoney.com

contributor, said: "This is a jobless recovery like the last one

in 1991-92, but it's a bit stronger despite the fact it's in the aftermath of a bubble, the worst bear market since the 1930s, despite corporate scandals and despite geopolitics."

Most economists agree the last recession ended in December 2001. In December 2002, GDP was 2.9% higher on a year-over-year basis. Fifteen months after the recession ended, the unemployment rate is unchanged at 5.8%, Banerji observed. In contrast, unemployment rose from 6.8% in March 1991, when that recession officially ended, to 7.8% 15 months later, while one year later the GDP was 2.3% higher.

The long-running bear market makes "it hard

for many to accept we've had any kind of recovery,

but this recovery is already stronger than the 1991-92 story," he said, while acknowledging a "different mix" today vs. 1991 in terms of consumer spending patterns, among other issues.

Simultaneously, Banerji was dismissive of those who believe the economy is going to enjoy a

virtuous cycle and briskly rebound after the war. "There's a lot of overcapacity," meaning no likely sharp rebound in business capital spending, he said. "This is how recoveries start,

but we're not going to take off like a rocket."

Like the stock market (and life), the outcome for the economy will probably fall somewhere in the middle of the extremists' views, Banerji suggested.

Looking forward, the cycle-watcher conceded the U.S. economy remains in a "window of vulnerability" and some "major shock" could send it into recession. The ECRI reported Friday its weekly leading index fell to 119.2 for the week ended March 28 from 120.5 the prior week. However, the index's six-month growth rate improved to negative 1% from negative 1.3%.

"Leading indicators are not yet consistent with recession

and Friday's employment report doesn't make it worse," he said. But "the longer we're in the window, the more we're exposed to dangers which could shock us into recession."

Because the economy is at a "tipping point" (ironically, the same term used by some allied commanders), Banerji admitted the ECRI's leading economic indicators won't provide a lot of lead time if, for example, a spike in oil prices or a setback in the war (or both) hits the economy.

Those convinced recession is inevitable should take appropriate steps, if they haven't already. But this week's action suggests many still believe the war's outcome will "tip" the economy in a more positive direction.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.