Well, don't be. Because the economy you thought you knew -- the one all those government statistics purport to measure and make rational and understandable -- actually may be on a stronger footing than you think. Then again, it could be much more volatile than before, with bigger booms and deeper busts. If true, that has major implications for policymakers -- not least Ben Bernanke, who on Feb. 1 succeeded Alan Greenspan as chairman of the Federal Reserve.

Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation.



What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas. "As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy. That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers.

Now, a generation of economists who came of professional age watching the dot-com boom and bust are trying to get a grip on this shadow economy: People like Carol A. Corrado and Daniel E. Sichel of the Federal Reserve Board, who, along with Hulten, figured out that businesses are spending much more on future-oriented investments than widely believed. In a way, these economists are disciples of Greenspan, who understood earlier than most that the conventional numbers don't capture the emerging knowledge economy.

Greenspan was continually digging into arcane factoids he hoped would give him a better insight into what was going on under the hood of the U.S. economy. And Bernanke seems to understand the importance of doing the same. In a speech last year, he said that intangible investments "appear to be quantitatively important." As a result, Bernanke noted, "aggregate saving and investment may be significantly understated in the U.S. official statistics."



Beyond Widgets

As Greenspan would be the first to tell you, it's a lot easier counting how many widgets the nation produces in a year than quantifying the creation and marketing of knowledge. After all, we're talking about intangibles: brand equity, the development of talent, the export of best practices.

This stuff is hard to measure, but to ignore it is to miss what the economy is telling us. And to miss that is to increase the likelihood of committing policy blunders. Including these intangible investments could provide a better picture of the economy, one that offers more advance warning of recessions, slippage in our ability to innovate, and other nasty surprises.



To understand why the government measures the economy the way it does, it helps to go back in time to the 1930s. The Great Depression had the nation in a death grip, and government planners and politicians lacked the tools to answer the big question of the day: Was the economy getting better or worse? To find out, the Commerce Dept. brought in economist Simon Kuznets, then at the National Bureau of Economic Research, to calculate for the first time the nation's income and output -- the purchasing power and production of the U.S. economy. Setting such a benchmark would allow the government to figure out if the economy was growing or shrinking.

Working with handwritten data, Kuznets and a small group of fellow economists began counting tangible things like machines and buildings as long-term investments. It made sense, since this was still the Industrial Age. And such calculations came in handy during World War II, when the Roosevelt Administration needed a fix on the nation's capacity to grind out tanks, ships, and planes.

A Break With The Past

Kuznets' work set the tone for the rest of the century, not to mention helping win him the Nobel prize in Economics in 1971. Machines and buildings were counted as future-oriented investment, but spending on education, training, and R&D was not. No attempt was made to judge the social utility of expenditures. For example, the $6 million cost of building the Flamingo Hotel, the Las Vegas casino opened by Bugsy Siegel in 1946, was tallied as an investment. But AT&T's funding of Bell Labs, where the transistor was invented around the same time, wasn't even included in GDP. Kuznets himself acknowledged the limitations of his system, yet it stayed basically the same for most of the postwar period.

By the early '90s, Greenspan was becoming increasingly frustrated by the official numbers' inability to explain a rapidly evolving economy. In 1996 and 1997 he refused to accept conventional data telling him that productivity growth was falling in much of the service sector, noting -- correctly, as it turns out -- that "this pattern is highly unlikely." He also pointed out that the official numbers for consumer inflation were too high.

At the Washington offices of the BEA, J. Steven Landefeld, who became director in 1995, felt pressure to include numbers that better reflected the knowledge economy. Landefeld isn't a rash fellow, and the pace of change at the BEA, while quick for a statistical agency, would be called deliberate by most. But in 1999 -- six decades after Kuznets laid the groundwork for calculating GDP -- Landefeld and the BEA decided to break with the past.

The BEA started treating business spending on software as a long-lived investment. The decision was overdue. Companies were spending more than $150 billion annually on software, far more than the $100 billion for computer hardware. And the software often stayed in use longer than the hardware. The fact that economists could go into stores and see software in brightly colored boxes reassured them that it was real. "Prepackaged software is a lot easier" to count, recalls Landefeld.

Silly as it may seem now, it was a revolutionary change at the time. But over the past seven years the economy has continued to evolve while the numbers we use to capture it have remained the same. Globalization, outsourcing, and the emphasis on innovation and creativity are forcing businesses to shift at a dramatic rate from tangible to intangible investments.

According to BusinessWeek's calculations, the top 10 biggest U.S. corporations that report their R&D outlays -- a list that includes ExxonMobil, Procter & Gamble, General Electric, Microsoft, and Intel -- have boosted R&D spending by 42%, or almost $11 billion, since 2000. Yet over the same period, they have only increased capital spending by a meager 2%, or less than $1 billion. So all together, these giants have actually increased their future-oriented investment by roughly $12 billion -- most of which doesn't show up in the BEA numbers.

This shift to intangibles looks all the more remarkable when we look a bit further back. P&G, for example, has boosted its spending on R&D, which doesn't count as investment in the GDP statistics, by 39% since 1996. By contrast, the company's capital budget, which does factor into GDP, is no bigger today than it was back then. The same is true at spicemaker McCormick & Co., where capital spending is basically flat compared to 1996 but R&D outlays to create new products have tripled over the same period.

Want to see how this works? Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China." Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods. Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005. Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.



That's why the new research from Corrado, Sichel, and Hulten is so important, and why building and improving upon it could become a key goal of economists in the coming years. Ultimately, we might end up with a "knowledge-adjusted" GDP, which would track the spending so crucial for global competitiveness.

Right now, though, rough calculations of these intangibles are all we have. To help come up with their $1 trillion number for unmeasured business investment, for example, Corrado, Sichel, and Hulten counted the portion of advertising designed to have long-lived effects on perception (that would include the sort of corporate image advertising seen here at BusinessWeek). They also estimated the value of new product development in the financial-services industry, which current R&D numbers miss. "We had to hunt around for bits and pieces of data," says Hulten.

Assessing how much bang for the buck companies get from their spending on intangibles is even harder, especially in the fast-changing knowledge economy. Take employee training. In the old days, that required flying people to a teaching facility, which cost companies a lot of time on top of the cost of the instructors and real estate. Now online learning and other innovations are driving down the cost of training. At IBM, the training budget fell by $10 million from 2003 to 2004, a 1.4% decline, while the number of classroom and e-learning hours rose by 29%. Are other companies seeing an equally dramatic decline in the cost of training? No one knows.

Changing Perceptions

That's why the BEA doesn't want to move too fast. It plans to publish supplementary accounts for R&D in the next few years, which will track R&D spending without adding it into the official GDP numbers. Other intangibles, though, remain below the radar. "No one disagrees with this conceptually," says BEA chief Landefeld. "The problem is in the empirical measurement."

But look at how our perception of the economy changes once you add in things like R&D and brand-building. The published data show that total investment -- business, residential, and government -- has been falling over the past three decades as a share of national spending, while consumption has been rising. Add in the intangible investments provided by our three economists, and the picture changes completely.

Total investment rises, going from 23.8% of national spending in the 1970s to 25.1% in the early 2000s -- much higher than the 18.3% the conventional numbers show. That helps explain why the economy has sustained strong productivity growth, and why foreign investors continue to pour money into the U.S.



Factoring in the knowledge economy also helps us understand why the recession of 2001 seemed worse than the official statistics showed -- and why the recovery was so slow. According to the published numbers, the six-month recession of 2001 was so mild the business sector actually grew at a modest 0.4% pace that year. By 2003, however, more than 3 million private sector jobs had disappeared.

One reason for this disconnect is simple: Corporations hacked back their budgets for R&D, advertising, training, and so forth. Yes, that canceled out a ton of high-paying jobs, but had no direct effect on GDP. Remember that R&D and other intangible business investments are not currently counted as national output. Therefore, when a company laid off an engineer doing long-term product development but kept selling the same number of its old products, GDP stayed the same. Productivity even went up, because fewer workers were producing the same amount of output. And if that laid-off engineer went to work, say, building houses? National output might even have risen.

There's enough data available through 2003 to estimate how business intangibles would have changed the growth numbers. For our purposes, let's assume that overall intangible business investment followed the same path as industrial R&D and advertising, for which annual data are available. Crunch the numbers and it looks like the business sector really grew by only 0.1% in 2001, less than a quarter of the size of the official increase. Growth in 2002 now also looks slower than the published data.

By contrast, the conventional numbers may be understating the strength of the economy today. The BEA announced on Jan. 27 that growth in the fourth quarter of 2005 was only 1.1%. In part that was because of a smaller-than-expected increase in business capital spending. However, employment at design and management-consulting firms is up sharply in the quarter, suggesting that businesses may be spending on intangibles instead. Indeed, the consumer confidence number for January zoomed to the highest level since 2002, as Americans became more optimistic about finding jobs.

Then again, the economy may hit bigger bumps in the years ahead. When companies significantly trim their spending on R&D, design, training, and other knowledge-enhancing activities, as they did in 2001, the resulting pain in terms of job losses and reduced innovation could deepen the next downturn.

Perhaps the trickiest and most controversial aspect of the shadow economy is how it alters our assessment of international trade. The same intangible investments not counted in GDP, such as business knowhow and brand equity, are for the most part left out of foreign trade stats, too. Also largely ignored is the mass influx of trained workers into the U.S. They represent an immense contribution of human capital to the economy that the U.S. gets free of charge, which can substantially balance out the trade deficit of goods and services. "I don't know that the trade deficit really tells you where you are in the global economy," says Gary L. Ellis, chief financial officer of Medtronic Inc., a world leader in medical devices such as implantable defibrillators. "We're exporting a lot of knowledge."

Time for another real-world example. In December, Intel Corp. announced plans to build a new wafer-fabrication plant in Israel. To the statisticians, the value of that foreign investment is the book value of the plant -- that is, the cost of erecting the building and installing the chipmaking machinery.

Not counted is the systematic export of knowhow to Israel that enables that factory to operate profitably. At the core is a program called Copy Exactly!, which requires that a new fab duplicate an existing one that is working well, down to how often the plant's pumps are serviced. All of this critical information is documented and transferred from the U.S. to the new plant, but it is not picked up by the trade statistics.

The numbers don't catch Intel's exhaustive training program either. To get its new plants running quickly, the chipmaker brings 800 or 900 employees from the new fab to spend a minimum of six months in Hillsboro, Ore., where Intel develops new production processes. By the time they return home, these people will have picked up not just the details of the process but also tribal knowledge -- the unwritten lore of how Intel works. With that info in their heads, they're equipped to get the new factory up and running at high volume within a quarter, rather than taking a year or more. In economics speak, this is a classic transfer of human capital. So why isn't it called an export?



Ricardo Hausmann, director of Harvard's Center for International Development, believes it should be. He describes these cross-border flows of knowhow as "dark matter." Hausmann notes that U.S. multinationals consistently earn higher rates of return than their foreign counterparts -- an average of 6% on foreign operations since 2000, vs. the 1.2% foreign multinationals earn in the U.S., according to the latest BEA figures. From that, he infers that the multinationals are benefiting, in part, from knowledge exported from the U.S., a country with faster productivity growth than the rest of the industrialized world.

Using these arguments, Hausmann finds that the U.S. current account deficit actually disappears, averaged over time. "With globalization, you develop a blueprint and sell it in all countries," he says. "Countries that are good at creating blueprints get more exports of dark matter."



Admittedly, most trade experts are hostile to Hausmann's conclusions. A recent report from Goldman, Sachs & Co. likened Hausmann's dark matter to cold fusion. And the economists at the BEA worry that adding knowledge exports to the trade stats would make published data less useful. "I have a problem putting fabricated flows into exports," says Ralph H. Kozlow, who oversees international accounts at the BEA. "You get into an impossible statistical maze when you try to value all of this at anything that anyone would believe."

But even if Hausmann is overstating his case, he's on the right track. There's no doubt that the statistical problems are formidable, but it's also certain that the conventional trade statistics are missing a big portion of the knowledge flows that create value these days. Suppose we assume that U.S. multinationals can earn an extra percentage point of return on their foreign investments by being able to use business intangibles exported from the U.S. Then a rough estimate of the value of the unmeasured exports of knowledge is anywhere from $25 billion to $100 billion per year, depending on what assumptions are used.

And let's not forget about immigrants. The workers who move to the U.S. each year bring with them a mother lode of education and skills -- human capital -- for free. One celebrated example is Jonathan Ive, the man who designed the iPod and iMac. Ive was born in England and educated at Newcastle Polytechnic University of Northumbria before joining Apple Computer Inc. in California in 1992.

Ive is not unique. Most of the workers who immigrate to the U.S. each year have at least a high school diploma, while about a third have a college education or better. Since it costs, on average, roughly $100,000 to provide 12 years of elementary and secondary education, and another $100,000 to pay for a college degree, immigrants are providing a subsidy of at least $50 billion annually to the U.S. economy in free human capital. Alternatively, valuing their contribution to the economy by the total wages they expect to earn during their lifetime would put the value of the human capital of new immigrants closer to $200 billion per year. Either the low or high estimate would make the current account deficit look smaller.



These numbers may also seem squishy. Still, if Fed chief Bernanke, corporate executives, and ordinary investors want to know where we've been, and where we're headed, tracking the creation and flow of knowledge is the only way to go.

The spending on the Iraq conflict alone is now approaching the cost of the Korean war, about $330bn in today's dollars. Meanwhile the cost of the overall "war on terror" - relabelled The Long War in the Pentagon - is already close to half a trillion dollars, and will soon equal that of the 13-year Vietnam war.

"There is some reason to be surprised that it's this much," said Steven Kosiak, a military spending analyst at the Centre for Strategic and Budgetary Assessments in Washington. "The Congressional Budget Office had estimated the defence department would need $85bn and that was with no drawdown in troops."

A White House budget official, Joel Kaplan, said that some of the extra spending would go towards keeping military equipment going in the desert, to accelerate training of Iraqi forces, and to give US troops better protection against roadside bombs. The budget request did not include reconstruction spending.

The defence secretary, Donald Rumsfeld, once predicted that the Iraq war would cost $50bn. George Bush's former economic adviser, Lawrence Lindsey, was forced to resign for being alarmist after predicting in 2002 that the Iraq war could cost up to $200bn. Even before the new supplemental requests, spending on the conflict in Iraq has reached $250bn.

Joseph Stiglitz, a Nobel laureate and Columbia University economist, has calculated that the Iraq war could ultimately cost $2 trillion, including lost productivity because of casualties and foreign deployments of reservists, as well as the long-term impact of disability payments and general economic disruption.

The administration's low pre-war estimates assumed that the invasion would be largely welcomed and coalition troops would quickly be able to hand over to a new government in Baghdad.

The money being earmarked for operations in Iraq and Afghanistan is outside the normal defence budget. That budget for 2007 is $439bn, a 5% increase.

The budget will be delivered to Congress at the same time as the Quadrennial Defence Review, in which the Pentagon lays out its longer term strategy. The review envisages the development of more mobile, specialised forces in smaller units. There will be a 15% increase in special operations forces, and a new air force drone squadron. Nearly 4,000 more troops will be assigned to psychological operations and civil affairs units.

Military experts have applauded the reforms but say the review does not explain how they will be paid for. There is no mention of cutting back on some of the huge and controversial equipment in development, such as the F22 and F35 fighter planes and the US navy's new DD(X) destroyer.

A British soldier from the 9th/12th Lancers has died following a road traffic accident outside Basra, the Ministry of Defence said yesterday. There was no suggestion of "hostile involvement". It is the 101st British death of the war.

The additional spending, along with other war funding the Bush administration will seek separately in its regular budget next week, would push the price tag for combat and nation-building since Sept. 11, 2001, to nearly a half-trillion dollars, approaching the inflation-adjusted cost of the 13-year Vietnam War.

The cost of military operations in 2006 is $35 billion higher than what Congress had estimated a few months ago that the Defense Department would need this year. The higher costs are occurring even as the Pentagon is planning to reduce troop levels in Iraq in coming months, reflecting the continuing wear and damage to military equipment in desert combat, the need to upgrade protection for U.S. troops and the effort to train and equip Iraqi forces.

No large-scale reconstruction projects are included in the spending, officials said.

Currently, the Defense Department says it is spending about $4.5 billion a month on the conflict in Iraq, or about $100,000 per minute.

Current spending in Afghanistan is about $800 million a month, or about $18,000 per minute.

The rising costs contrast with projections before the war. Former White House economic adviser Lawrence Lindsey predicted in late 2002 that the war would cost between $100 billion and $200 billion, drawing administration ire for offering such high estimates and eventually resigning his post.

In spring 2003, top administration officials, including Deputy Defense Secretary Paul Wolfowitz, said Iraq's vast oil reserves would help defray the costs of an extended U.S. stay. Nearly three years later, oil revenues are far below expectations and the Iraqi government is able to pay for only a fraction of its reconstruction.

The White House also told Congress on Thursday that it will ask for $18 billion in supplemental funds for Hurricane Katrina relief, bringing to $105 billion the amount the administration plans to spend on relief and rebuilding efforts along the Gulf Coast.

Firms expect the first quarter of 2006 to be even worse than the final three months of 2005 and are already reporting a sharp increase in the number of consumers calling helplines as a result of the debts amassed during shopping binges over Christmas and the New Year. There is no sign of the upward trend in insolvency coming to an end, they said.

Figures from the DTI showed that the number of personal insolvencies rose by 15% in the final three months of 2005 and were 57% higher than in the same quarter of 2004. The total has doubled in the past three years.

Steve Treharne, Head of Personal Insolvency at KPMG said: "The bankruptcy bubble is getting bigger but seems unlikely to burst for some time yet. The levels and availability of credit have been increasing for some time and recent figures from the Bank of England show that this trend is continuing.

"Since Christmas we have seen a dramatic increase in the number of people calling debt helplines, which demonstrates the continued build-up of overindebtedness. As a result, in 2006 we expect to see 60,000 bankruptcies and around 40,000 individual voluntary arrangements, by far the highest level ever seen."

Separately, data from the Department of Constitutional Affairs showed that mortgage repossessions and arrears were also rising. With house price inflation easing, unemployment rising gently and interest rates higher than they were two years ago, orders by courts to repossess homes were 58% higher between October and December than a year earlier. Actions entered by lenders - the first stage of the repossession process - were at their highest level since the depths of the property crash of the early 1990s.

Geoff Carton-Kelly, chairman of business recovery at Baker Tilly accountants said: "There is a massive availability of credit, and people still want to live now and pay later." An increasing number of debtors, he added, were opting for IVAs as a way of dealing with their creditors rather than bankruptcy. IVAs allow those in work to offer regular repayments while often safeguarding the debtor's house.

Recent statistics have shown that women are now nearly as likely to file for bankruptcy or insolvency as men, and that the average age of those in trouble has fallen. Mr Treharne said: "Despite student loans being taken out of the bankruptcy equation, in 2005 nearly 900 former students were so desperate they decided bankruptcy was still the best option for them. Clearly, this is not the best start in life for a graduate."

Mike Gerard, a personal insolvency expert at accountants Grant Thornton, said insolvency was no longer confined to those on poor incomes. It was not uncommon, he said, for someone on an income of £40,000 a year to have unsecured debts of £100,000 to £150,000.

The warrant was issued by Bow Street magistrates, central London, after an application from lawyers representing Palestinians who say they suffered because of the Israeli general's alleged illegal orders.

Ministers are said to believe the law is too unpredictable and can risk jeopardising international relations. The warrant naming General Almog for war crimes is believed to be the first of its kind issued in Britain against an Israeli national over conduct in the Palestinian conflict. A British official confirmed that ministers were examining stopping private individuals applying to magistrates for prosecutions over war crimes, genocide and torture, which in turn leads to international arrest warrants being granted.

Under international law, Britain has a duty to arrest and prosecute alleged war crimes suspects if they arrive on its territory, even though the alleged offences occurred overseas.

Gen Almog is alleged to have ordered the destruction of 59 Palestinian civilian homes in revenge for the death of Israeli soldiers, in breach of the Geneva conventions.

Since last September, Israeli officials have met twice with Home Office officials and Foreign Office representatives regarding the attempted arrest. The government has denied claims that US officials want the British law changed, fearing their officials could be arrested for alleged human rights abuses.

Gen Almog said he was tipped off by the Israeli military attache in London, who boarded his plane at Heathrow. Police rejected demands to investigate who tipped off the general, saying in a letter seen by the Guardian from Peter Clarke, the national anti-terrorism coordinator, that they lacked the resources to do so.

Daniel Machover, the solicitor who brought the prosecution, has made an official complaint about the lack of an investigation and police "failure" to board Gen Almog's plane at Heathrow. Mr Machover said any change would weaken the government's claim to be resolute in fighting serious human rights abuses.

He said; "If the UK goes ahead and bends to Israeli pressure, while Israel continues its universally condemned illegal practices, this will sent the worst possible signal to the Israeli army. The British government is completely obsessed with controlling these processes."

Several Labour backbenchers have tabled questions, including Phyllis Starkey, MP for Milton Keynes South West, who said: "The obvious concern is the way in which the Israeli government in particular seems to be given quite favoured access to interfere in UK domestic policy."

The government says any change would be referred back to parliament. The foreign secretary, Jack Straw, apologised to his Israeli counterpart over the attempted arrest, and the warrant has been withdrawn.

A Home Office spokeswoman said: "The government is carefully considering the implications of the General Almog case. The government is currently considering a range of matters relating to the issuing of arrest warrants in international cases, but has not yet concluded what changes, if any, are required. There have been two meetings by home officials with Israeli officials regarding this matter. The Home Office has not been in contact with US officials on this matter."

A spokeswoman for the Israeli embassy in London confirmed meetings with British officials and said: "We would like to find a solution to this unacceptable situation." She added that the right of individuals in Britain to obtain warrants in cases of alleged war crimes had been abused. "This has been used by people to promote their own agenda, and that's the worry we're expressing."

It was reported that shortly after the attempt to arrest Gen Almog, the matter was discussed by the Israeli and British prime ministers at a meeting of the UN in New York.

But the statement, which needs approval from all council members, has not yet received agreement from Qatar, the only Arab nation in the 15-member body and China, a close ally of Khartoum, council envoys said.

Specifically, the Security Council would "support in principal" a transition from the African Union mission in Darfur to a U.N. operation, the draft says. The AU has some 7,000 monitors and soldiers in a region the size of France and chronically suffers from lack of financing.

The draft statement requests U.N. Secretary-General Kofi Annan to "initiate contingency planning without delay" on a range of options and integrate any new operation with the current U.N. peacekeeping mission in southern Sudan.

Final authorization will take at least another month. The African Union has not yet formally agreed to join or turn over it operation to the United Nations. Nor has the Khartoum government given its consent.

The Darfur conflict erupted into violence in early 2003 when African tribes took up arms accusing the Arab-dominated Khartoum government of neglect. The government retaliated by arming Arab militia, known as Janjaweed, who began a campaign of murder, rape, arson and plunder and drove 2 million villagers into squalid camps. Khartoum denies responsibility.

SEVERAL YEARS

In Khartoum on Thursday, the head of the AU mission in Sudan, Baba Gana Kingibe, told reporters any U.N. force should count on being in Darfur for two to three years to help guard refugees returning to villages from squalid camps.

But he said it was inevitable the United Nations would have to take over.

"It is clear in our minds that a transition is inevitable in the long run for the simple reason that it will create a more efficient single peace support operation for the whole of Sudan, bringing coherence and synergy, and integration of political, humanitarian, military and post-conflict issues," Kingibe said.

Jean-Marie Guehenno, the undersecretary-general for peacekeeping, has started planning but needs a firm decision from the Security Council before recruiting any troops.

No one knows who would join such a force, with Annan hoping Western nations, including the United States and Europeans, would help with an aggressive mobile force and air power.

Bolton's presidency of the Security Council for the month of February brought calls from advocacy and humanitarian groups for the United States to do something in Darfur following an analysis from the top U.N. envoy in Sudan that international efforts to bring peace to Darfur had failed.

"All we did was picking up the pieces and muddling through, doing too little too late," Jan Pronk told the Security Council on Jan. 13.

He estimated 20,000 troops would be needed to disarm marauding militias and protect refugees who want to go home, but U.N. officials say this number is too high. (Opheera McDoom in Khartoum contributed to this report)

Police investigator SPO2 Sangkula Hussin said the gunmen must have been very angry at the victims but the reason for the killings remained unclear.

Like most villagers, the victims were unarmed.

"They were ruthless," another villager said, looking at the bodies.

The shooting lasted for about 10 minutes, police said, judging from the number of empty shells recovered.

Villagers told the Inquirer that they could not understand why such an incident could happen in their community, which is practically surrounded by military camps.

The close-knit community of tattered houses and makeshift shanties lies near the headquarters of the 3rd Marine Brigade. Another military installation is about 500 meters away.

"All the angles are being looked at. We cannot yet make any conclusions," Col. Domingo Tutaan of the military's Southern Command said by telephone from Jolo, the Associated Press reported.

Houses strafed

Unlicensed firearms are easy to obtain in the Sulu area.

The killings took place a week after eight people were killed by five gunmen who strafed a billiard hall in Balabagan, Lanao del Sur.

Police said the Balabagan attack was apparently part of a rido (family feud) as a son of one of the alleged assailants was killed in the same town last month.

The attack occurred at about 1 a.m. when some 20 unidentified men strafed the houses of the Patenga, Fontanilla and Casipong families in Barangay Liang, according to Senior Supt. Ajura Asirim, police provincial director.

"The suspects used high-powered firearms based on the type of shells our investigators recovered from the scene. They also used grenade launchers although these failed to hit the houses," Asirim said.

The victims

Killed were 8-month-old Melanie and her mother Sulma, 35, her father Leonardo, 40; Aurelio Fontanilla, 50; Pedro Casipong, 56, and his daughter Emma, 16.

Injured in the Patenga household were Jason, 4; Susan, 11 and Alkamar, 3.

Wounded in the Fontanilla family was Jennifer, 22. Among the Casipongs, housewife Lucrecia, 53, was wounded.

Asirim said the attackers had apparently deliberately targeted the victims because minutes before the incident, the armed men even asked directions from neighbors.

Deep anger

"This is what we are trying to discern so we could uncover the motive and possibly, the identities of the suspects," he said.

Asirim agreed with Hussin's observation that the suspects must have harbored deep grudges against the victims because they made sure the victims were dead.

Lucrecia Casipong said the firing was relentless.

She said that during the shooting, her main concern was the safety of her family.

"I crawled over to Emma [her daughter] and hugged her because I thought she must be very scared already. But then I noticed she wasn't moving and blood was all over her. It was then I realized she was dead," she said.

Bullets fly

As bullets flew over her head, Lucrecia said she crawled again toward her husband to tell him about Emma.

But he, too, was dead.

When the firing ended, Lucrecia said she heard Susan crying for help. She yelled back and told her she could not go to her because her husband and daughter were dead.

Lucrecia said it was so dark and she lay on her belly for a long time until she decided it was safe to move around.

No help came

"I cried hard for help too but nobody dared come," she said.

It was only at sunrise that neighbors, some living just 10 meters away, came over.

Residents said they did not come because they were so scared.

"Besides, what can we do? We do not have weapons," a man said.

Jennifer Fontanilla, who said she survived the attack by hiding under her bed, told government-run Radyo ng Bayan that before the shooting, the armed men roused them from sleep and demanded to know if they were Christians or Muslims, the AP said.

Gunmen returned

Asirim said he learned Marines had come but they failed to catch up with the killers.

"We want to get to the bottom of this incident," he said.

The Inquirer learned that the area where the victims lived belongs to the Vicariate of Jolo. It was the late Bishop Benjamin de Jesus who had asked the villagers to live there.

The violence came less than three weeks before a small group of 250 US soldiers deploy on Jolo island for joint military exercises.

About 5,000 US troops are to take part in the annual "Balikatan" war games to be conducted throughout the Philippines.


With reports from Ed General, PDI Mindanao Bureau, and Inquirer wires