By GARY BELSKY AND SERGE F. KOVALESKI Reporter associate: Baie Netzer

(MONEY Magazine) – When the rolling thunder of U.S. and allied warplanes began pounding Iraqi forces on Jan. 16, hopes were high for a speedy high-tech end to the war in the Persian Gulf. But that optimism quickly gave way to the fear that fighting could drag on for months in a bloody ground war. Iraqi troops adopted scorpion tactics, hiding under desert rocks and lashing out poisonously at allied forces. Iraq's Scud missiles harassed Saudi Arabia and Israel. Sober reality tells us that even if hostilities end quickly, they may be followed by protracted chaos in the Middle East and a resurgence of international terrorism. Moreover, America's first sustained war in 18 years has hurt the U.S. economy, which already faced a recession exacerbated by volatile oil prices and plunging consumer confidence, and the damage may linger well after the fighting stops. This special report will tell you what the war will mean for the economy -- and for the financial issues that concern you most directly: your job, the prices you pay, your taxes, your home, your savings and your investments.

The financial consequences of the gulf war will break new ground for this country. Historically, wars have boosted the domestic economy. In both World War II and the Korean War, for instance, military spending fueled economic growth for at least a year after hostilities began. And within two years after the start of both those wars, the stock market posted gains of more than 19%. This pattern, however, probably won't hold for this war, which comes at a time when the U.S. is battling a recession that could balloon the federal budget deficit to more than $300 billion this year before adding in higher military spending. Rather than stimulate the economy, many experts say, the war could slow recovery. The chief reason: most of the military buildup came in the defense-spending boom of the Reagan years well before the bombing began; it is this enormous inventory of missiles, planes and tanks that is being thrown at the Iraqi forces. As a result, much of the $17 billion to $35 billion that the Congressional Budget Office estimated Operation Desert Storm can cost the U.S. this year will go toward fuel, food and personnel expenses. Such immense spending will further strain federal coffers while doing little to benefit U.S. industry. This conflict is also different because the potential war zone includes 44% of the world's exportable oil supplies. Fears of a sudden, disastrous oil shortage pushed the price of a barrel of crude from $17 to more than $41 after Iraq invaded Kuwait last year, though prices have since fallen by almost half to a recent $21. That spike took a severe toll on the confidence of consumers and businesses. A recent Conference Board report said that consumer confidence, a key economic indicator, plunged 12% in January to the lowest level in a decade. ''The confidence effect is very important to the economy,'' says Merrill Lynch senior economist Bruce Steinberg, ''and both consumers and businesses have reason to be cautious.'' (For more on American consumers' level of confidence, see Editor's Notes on page 7.) All in all, economists believe that the war will not help the economy in the near term; at worst it may already have delayed the recovery until after the middle of the year. Overall for 1991, expect to see: -- Little or no economic growth. The gross national product shrank by 2.1% in the fourth quarter of 1990, the first such drop in more than four years. Although some experts are forecasting GNP growth for the year as a whole, others see a slight decline. Argus Research director of research James R. Solloway forecasts a weak economy into the third quarter with an upturn in the fourth that leaves the GNP down 0.6% for the year. -- Higher unemployment. The jobless rate, which fell to a 15-year low of 5.1% in March 1989, could rise from a current 6.2% to 7% by year-end. As in previous recessions, it will take a few months after the recovery begins for hiring to pick up. By the end of 1992, though, unemployment could be back down to around 6%. -- Lower inflation. Barring an extended spike in the price of oil, inflation won't rise as fast this year as in 1990, when the consumer price index advanced 6.1%. In fact, as long as oil stays below $25 a barrel -- as most economists now think -- inflation will slow considerably. Kemper Securities chief investment strategist Rao Chalasani sees the inflation rate easing to 4% by the end of 1991. -- Lower interest rates. Now that the Fed is aggressively pushing down short- term rates, they could drop as much as half a percentage point from current levels by midyear. Yields on three-month Treasury bills could fall to 5.5% -- before moving back up near year-end. And 30-year Treasury bond yields, now around 8%, could dip to as low as 7.25% by midyear before rising to 7.85% or so by late in the year. Obviously, the precise course of the war is impossible to predict, and the economic outlook could change radically. To help you choose a strategy that will protect your financial well-being, however, MONEY canvassed readers like you all across the country and then interviewed three dozen leading economists and investment advisers to get their answers to your most pressing questions about the economy in general and your money matters in particular.

EMPLOYMENT Even without a war, this year's job prospects would have been bleak. In its most recent quarterly employment outlook -- conducted before hostilities began -- the Milwaukee temporary-help firm Manpower found that 15% of the companies they interviewed planned to increase hiring in the first quarter, while 16% planned to cut back. This was the first time since 1983 that the survey showed staff reductions exceeding increases. The poor job picture extends a yearlong trend that jacked up the unemployment rate for the first time since 1982. Little wonder: with consumer confidence deeply depressed and industrial production declining at an annual rate of 8% during the final quarter of 1990, businesses were hardly in a hiring mood. Unlike past wars, this war probably won't reduce unemployment. Experts say there won't be the labor shortage seen during Vietnam, when active-duty military employment reached 3.5 million people, or 4.5% of the labor force. Argus' Solloway expects a 7% jobless rate by the fourth quarter and warns that recovery won't be swift. Right after the 1981-82 recession, unemployment peaked at 10.8% and took a year to fall to 8.3%. What are your chances of losing your job? Lower if your job is in electronics, communications or health-care industries; higher if you work in the so-called FIRE sector -- finance, insurance and real estate. Bank and brokerage employment, in particular, will shrink as many of those institutions try to stem mounting losses by discarding workers, says William Morin, chairman of the outplacement firm Drake Beam Morin in New York City. For those already out of work or looking for a change, the best job-hunting prospects in 1991 can be found in the Northwest and Midwest -- where hiring in mining, aerospace and electronics should increase. These predominantly industrial areas, hit hard by the last recession, won't suffer as much this time around. Job prospects in southern states also are expected to remain stable, particularly in services, transportation and light manufacturing, such as textiles. Opportunities seem poorest in the Northeast, especially in areas like Boston or New York City -- where, for example, almost 8%, or 44,000 jobs, have been lost in the FIRE sector since the 1987 stock market crash. (See page 142 for MONEY's city-by-city guide to the hottest job markets over the next five years.)

PRICES Oil is the critical factor in inflation because prices for everything from oranges to socks reflect the cost of energy used for production and transportation. After crude prices hit their peak of $41 a barrel back in October, the annualized inflation rate reached 6.9%. But now, oil prices are expected to stabilize at current levels of around $21 or even drop to $18 or less because surplus supplies of oil are available worldwide. As a result, many economists are confident that inflation will ease to 4% by year-end. Longer term, most analysts see the worldwide oil glut keeping inflation below 5% during the 1990s. ''Demand for oil has been growing more slowly over the past few years, while OPEC countries have been increasing their output more rapidly,'' says Larry Goldstein, president of the Petroleum Industry Research Foundation in New York City. Lower oil prices could translate into a 5 cents to 10 cents drop in the cost of self-service unleaded gasoline, from today's average of $1.16 a gallon, and a similar slice from heating oil prices. (A $1 change in the cost of a barrel of oil roughly equals 2 1/2 cents for a gallon of gasoline.) Soaring oil prices also pushed up the cost of air travel -- at least temporarily. In recent months, airlines have raised ticket prices by an average of 15% to pay for more expensive jet fuel. When that costlier fuel broke the back of already struggling Eastern Airlines, the bankrupt airline's competitors raised fares on many routes. For example, United Airlines raised its cheapest Chicago-Miami round-trip fare 24%, to $245 from $198. These fare hikes, however, are unlikely to last for more than a month or two. Fearing Iraqi-inspired terrorism, many travelers have canceled trips. International travel is down 30% to 50% by some estimates. ''Airlines will have to cut prices to get people back on their planes,'' says Dean Witter Reynolds analyst Mark Daugherty.

TAXES On the first day of the war alone, the United States unleashed more than 100 Tomahawk cruise missiles -- at a cost of $1 million each. Assuming that the Tomahawks and other high-priced, high-tech weapons will be replaced, it's easy to see how estimates for this war are approaching $500 million a day. A three- month war could cost $50 billion, and the price tag for a prolonged war -- six months or more including extensive ground fighting -- could easily top $100 billion. The question of who pays, and when, has yet to be settled. ''If the war ends in two or three months, we wouldn't need a tax hike,'' says David Backus, economics professor at New York University's Stern School of Business. ''But if it goes on for six months, we may have to revise that view.'' Several countries, despite some internal opposition, have promised to help pay for the war effort: Japan has pledged $11 billion worth of aid; Germany more than $9 billion; the Kuwaitis $16 billion; and the Saudis are committed to provide billions of dollars in food, fuel and other necessities. But if the war drags on for months, their willingness to kick in more will probably fade, making a tax increase even more necessary. The Administration has said there will be no need for an income tax surcharge like the 10% levy that President Johnson imposed in 1968 to pay for the Vietnam War. More likely is a new tax on gasoline or imported oil. A levy of $1 per barrel could bring in $3 billion a year. Further, in a recent Time/ CNN poll of 1,000 American adults surveyed by Yankelovich Clancy Shulman, 54% said they would support an oil tax to pay for the war.

YOUR HOME New home starts plummeted 13% last year to their lowest level since 1982, and sales of existing houses dropped 4.3%. Prices have fallen as much as 20% in several areas of the country and could decline even more -- especially if a grinding war prolongs the recession. For the first time since the National Association of Realtors began keeping records in 1968, the median price for a single-family home went down this past November by 1.9%; in December there was a further 0.6% drop. For the year as a whole, the median U.S. home price inched up 2.6% to $95,500 -- actually a 3.5% decrease after inflation is taken into account. The outlook is considerably worse for this year. The NAR is forecasting a 0.9% dip to $94,600 -- or an inflation-adjusted plunge of more than 5%. Of course, the housing market varies greatly from one region of the country to another. Homeowners in the Northeast have been hardest hit by far. After years of spectacular increases, the median sale price for a single-family home in the Northeast fell 2.8% in 1990, to $141,200. ''Prices in that area weren't real a few years ago,'' says Christine Williams, a vice president of the Real Estate Research Corp. in Chicago. ''Now they're getting real.'' Ditto for California and other parts of the West, where the median fell 0.2% last year to $139,600. The steadiest markets: the Midwest and South, where median home prices rose 3.8% and 1.5%, respectively, to $74,000 and $85,800.

Last year's regional pattern will probably repeat: some appreciation in home values in the South and Midwest, continuing depreciation in the West and Northeast. ''This is not an environment in which you could expect the demand for housing to improve and with it the value of home prices,'' says Lyle Gramley, chief economist for the Mortgage Bankers Association in Washington. Unless you absolutely have to sell your home, there's no point in worrying about the current dip in home values. Stay put and cut your costs. If you're paying 11.5% or more on a fixed-rate mortgage and you expect to remain in your house for at least five years, it makes sense to refinance as long as you can lower your rate by two percentage points. Many homeowners could get that chance this year, since fixed-rate mortgages could drop from a current 9.65% to as little as 8.25%, according to Michael Sumichrast, publisher of Real Estate Perspectives in Washington. Holders of adjustable-rate mortgages (ARMs), which are generally tied to short-term interest rates such as the yield on a one-year Treasury bill, will probably benefit without having to do anything. A typical $100,000, 30-year ARM with a rate reset yearly that cost $764 a month in 1990 (based on an 8.43% rate) would be $55 a month less this year ($709 a month, based on a 7.64% rate).

SAVINGS During uncertain times, smart investors try to keep larger-than-usual amounts in cash -- six months' expenses instead of a customary three months'. But finding a secure shelter for your money is a tough mission these days. Chief among your investment choices are certificates of deposit, money-market accounts as well as money-market mutual funds. For starters, since CDs at virtually every bank and savings institution are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000, they have government backing comparable to that of federal agency securities. In general, investment strategists say federally guaranteed CDs are your best bet right now -- not simply because they are safe but because short-term rates have been falling and are likely to continue to sink through most of the year. ''The slide is not over yet,'' says Bank Rate Monitor publisher Robert Heady. He expects the average yield on six-month and one-year CDs to drop from 6.9% to less than 6.5% by midsummer. So it makes sense to choose certificates with maturities of at least a year to lock in today's rates; don't go beyond 2 1/2 years, though, because interest rates could rise again once the recovery is well under way.

Money-market deposit accounts (MMDAs) at banks could see a much smaller decline in yields, but only because their yields are low to start off with. The average MMDA was recently paying 5.8%, compared with 7% or more for most money-market mutual funds. For MMDAs, says Walter Frank, chief economist at IBC/Donoghue's, ''The main advantage is that the accounts are at local banks, and people feel more comfortable.'' Investors who don't want to tie up their money in CDs are best off putting their cash in taxable money funds, which, though not federally insured, have an excellent safety record. Among the funds with above-average yields and a high degree of safety are Vanguard Money-Market Prime (800-662-7447), yielding 7.3%, and Flexfund Money Market (800-325-3539), 7.1%. But as short-term interest rates ease, even the best money funds will see their yields slide to perhaps 6.8% within six months. One way to lock in higher yields is by investing in short-term bond funds instead of money funds. Such mutual funds hold government or high-quality corporate bonds with average maturities of one to five years. While the funds' share prices do not remain absolutely constant, as money fund shares do, the prices of short-term bond funds will probably fluctuate by only 1% or 2% over the course of a year, says Reg Green, publisher of Mutual Fund News Service. Moreover, yields on the funds, generally 8% or more, are likely to decline far more slowly than those on money funds. Analysts recommend short-term bond funds offered by major mutual fund companies such as Vanguard Fixed Income Short-Term (800-662-7447), yielding 8.3%, and Scudder Short-Term Bond (800-225-2470), paying 9.3%. If you are more comfortable investing in securities guaranteed by the U.S. Government, money funds that hold government issues are an attractive choice. The safest are funds invested fully in Treasury securities, such as Dreyfus 100 Percent U.S. Treasury (800-829-3733), yielding 7.2%, and Benham Capital Preservation (800-472-3389), 6.3%. Interest on Treasury funds is exempt from state and local income taxes in many states. This can add as much as half a percentage point to the effective yield for a top-bracket saver in states such as California and New York. For individuals with $10,000 or more to invest, Treasury bills are a first- rate choice; their interest is also exempt from state and local levies. The most convenient way to buy is through a bank or brokerage, where you will pay a commission of $25 to $50. You can avoid this fee by buying direct from the Federal Reserve. Some savers may be tempted to put their money into tax-exempt money funds, which invest in securities backed by state and local governments. While interest on such funds is exempt from federal taxes -- and sometimes from state and local taxes too -- tax-exempt money-market funds may not be as safe as taxable funds. The reason: some states -- such as New York and Massachusetts -- face serious financial problems that could get ruinous this year.

INVESTMENTS . Just 17 days before war erupted in the gulf, the stock market posted its first losing year since 1984, with the Dow Jones industrial average down 4.3% at 2634. Since then, the market has rebounded so strongly to above the 2700 level that a growing number of stock analysts see the start of a new bull market. But others warn that stocks could suffer another sustained decline, with the Dow dropping below last October's low of 2365. Nonetheless, at current prices there are still undervalued stocks worth adding to your portfolio. Given the stock market's current uncertainty, though, conservative investors should have no more than 40% to 50% of their portfolios in stocks. The rest should be kept in cash havens such as CDs and money funds or invested in top-quality bonds. Then, if stocks drop sharply, you can use cash reserves to add to your holdings. The best stock choices now are blue chips with price/earnings ratios of 14 or less. Among such stocks that have above-average yields, Michael Metz, chief market analyst of Oppenheimer & Co., likes Du Pont (recently traded on the New York Stock Exchange at $35.25), with revenues of $39 billion, yielding 4.8%; Exxon (NYSE, $50.50), $105 billion, 5.2%; and J.P. Morgan (NYSE, $48.50), with assets of $105 billion and a 4.1% yield. Shares with higher P/Es and lower yields may also be attractive if the companies have sizzling growth prospects. William LeFevre, senior vice president of market strategy at Advest in New York City, recommends consumer- oriented companies such as Philip Morris (NYSE, $58), with revenues of $56 billion, Procter & Gamble (NYSE, $80.25), $27 billion, and Coca-Cola (NYSE, $48.25), $11.2 billion. ''Even if things get really bad, people will still smoke cigarettes and kids will keep drinking Coke,'' says LeFevre. Since the U.S. is fighting Iraq with weapons stockpiled over the past decade, analysts say that only selected defense stocks stand to benefit from the war in the gulf. One is E-Systems (NYSE, $34), with revenues of $2.1 billion, which manufactures defense electronics systems for surveillance and reconnaissance. Analyst Byron Callan at Prudential-Bache expects E-Systems' future earnings to benefit as a result of new business from Saudi Arabia, which is likely to have postwar intelligence worries about Yemen, Jordan, Iraq and Iran. With interest rates dropping, many analysts say that now is a good time to add high-quality bonds to your portfolio. Since rates have already fallen nearly one percentage point, however, it may be late to aim for capital gains on long-term issues; the profit potential may not be enough to make up for the bonds' volatility. Intermediate-term bonds -- those with maturities of five to seven years -- offer a better combination of low risk and high return. ''The shorter the maturity of a bond, the less you would lose if there were a suprise upturn in interest rates,'' says Robert Stovall, president of Stovall/ Twenty-First Advisers, a money-management firm in New York City. Another attractive alternative for income-oriented investors is electric utilities, which behave a lot like bonds. Top-quality shares offer yields as high as 8%. Analyst Barry Abramson at Prudential-Bache recommends SCEcorp (NYSE, $37.50), revenues of $7.3 billion, the parent of Southern California Edison, which yields 6.9%. The company's growth rate of 4.5% annually over the past five years could be boosted to 5.5% by a pending merger with San Diego Gas & Electric, which is expected to be approved later this year. Abramson also likes $2.4 billion Northeast Utilities (NYSE, $20), the largest electric company in New England, which pays an 8.8% yield and should see earnings grow by 3% to 4% a year. Investors who prefer the convenience of mutual funds may want to focus on conservative blue-chip funds. Don Phillips, editor of Mutual Fund Values (53 W. Jackson Blvd., Chicago, Ill. 60604; biweekly, $395 a year), likes two that cut back their stockholdings sharply when the market appears risky: the Strong Investment Fund (1% load, 800-368-3863) and Mathers Fund (no load, 800-962-3863). Both funds are extremely defensive right now with more than 80% of their assets in bonds and cash. You should be careful, though, about one category of funds that have been strong performers during the past year and a half -- those that hold foreign stocks and bonds. Much of the gain on these international funds has come from the decline of the dollar. Since 1985, the dollar has fallen by 40% vs. major foreign currencies, which has boosted the value of foreign securities for U.S. investors. While the dollar could sink another 5% to 10%, economists expect that it will start recovering within six months. If that happens, international mutual funds are likely to be poor performers after the midyear. You should also be skeptical about gold, which has fallen from $403 to $361 since the war began. ''I don't see any reason to be a buyer right now,'' says Richard Young, editor of International Gold Report (Federal Bldg., 366 Thames St., Newport, R.I. 02840; monthly, $99 a year). For investors who want to put 5% to 10% of their portfolios into gold investments as a long-term hedge against the return of rapid inflation, Young recommends American Barrick Resources (NYSE, $18.75), with revenues of $285 million; Homestake Mining (NYSE, $14.75), $525 million; and Newmont Mining (NYSE, $35), $725 million. ''There are only about a dozen large, investment-grade North American gold mines,'' says Young. ''And these are three of the big names that institutional investors would concentrate on if a new bull market started up for gold.'' Over the next year or two, though, inflation is not likely to be much of a threat. With a portfolio of blue-chip stocks and top-quality bonds, you'll be well positioned to ride out both the war and the recession -- however long they last.

BOX: Q WILL INFLATION SPEED UP? -- Wally and Lauren Mueller Lakewood, Ohio A No, quite the opposite. Last fall's spike in the price of oil boosted inflation above 6%. Now that the oil price has dropped back, however, most economists expect inflation to decline to as little as 4% by year-end.

Q WILL THIS RECESSION GET MUCH WORSE? -- Robert Kaprall Minnetonka, Minn. A It's possible. Fed chairman Greenspan is trying to end the slump by pushing down interest rates. But if the war lasts past March 30, forecasters say that hard times could stretch into the third quarter.

Q WHERE ARE INTEREST RATES HEADED? -- Kevin Gardner Mandeville, La. A In a word, down. With the Fed trying to stimulate the economy, interest rates could fall more than half a percentage point by mid-year. That would mean lower yields on your CDs but cheaper rates on many loans.

Q WILL THERE BE A WAR TAX? -- Richard Valenzuela Phoenix, Ariz. A If the war is short, probably not. If it continues for six months or longer, however, a tax hike may be unavoidable. A levy on gasoline or imported oil seems to be more likely than an income tax surcharge.

Q WILL MORTGAGE RATES FALL? -- Joseph D. Feaster Jr. Roxbury, Mass. A Yes, perhaps by half a percentage point by midyear. In the process, the monthly payment on adjustable-rate mortgages would ease, and homeowners with fixed rates above 11.5% might be wise to refinance.

Q WILL OUR HOUSE BE WORTH MORE NEXT YEAR? -- Steve Park Jacksonville, Fla. A Chances are it won't. Home prices in Florida will probably be flat this year. But that's still better than average. For the U.S., the National Association of Realtors sees a near-1% decline in the median home price.

Q WILL GASOLINE COST MORE? -- Mike Donnell Mundelein, Ill. A Not unless the war cuts off the flow of Persian Gulf oil. In fact, because crude prices have fallen by half since October, gas prices could drop 5 cents to 10 cents -- assuming there isn't a gas tax to pay for the war.

Q WHERE'S THE BEST PLACE FOR MY SAVINGS? -- Cindy Shapiro Edina, Minn. A Certificates of deposit are a top choice. Since short-term rates are sliding, you may want to lock in today's yields with one-year CDs paying 7% or so, instead of with money funds whose payouts could fall to 6.8%.

Q WILL IT BE CHEAPER TO FLY SOON? -- Bob Geddes Pacific Palisades, Calif. A Yes. Jet fuel is likely to get cheaper. In addition, many travelers are canceling trips because they fear terrorism. Experts expect that airlines will have to cut their fares to lure back vacationers, at the very least.

Q IS NOW THE RIGHT TIME TO BUY STOCKS? -- Sheryl Wiley Solomon St. Louis, Mo. A If you're selective. Even with the market up 18% since last October's low, there are still plenty of attractively priced stocks, such as blue-chip issues with moderate P/Es and above-average dividend yields.

Q SHOULD I LOCK IN YIELDS ON BONDS? -- Ben Chamish Boca Raton, Fla. A Yes. Since interest rates are falling, it makes sense for investors to secure high yields of 8% or more on top-quality bonds. Investment strategists recommend issues with maturities of five to seven years.

Q ARE INTERNATIONAL MUTUAL FUNDS RISKY? -- John Evans Aloha, Ore. A Yes, and they're getting riskier. The falling dollar boosted many foreign stock and bond funds for the past year and a half. But when the dollar rebounds, perhaps by fall, those funds will suffer.