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Recovery put on hold
September 20, 2001: 8:24 a.m. ET

Terrorist attacks quash hopes for quick turnaround in manufacturing sector
By Staff Writer Kim Khan
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NEW YORK (CNNfn) - The word "recession" already was being used for the U.S. manufacturing sector before the terrorist attacks on New York and Washington, but so was the word "recovery." Now the future is murkier.

The beleaguered manufacturing sector is expected to suffer even more in the wake of the attacks, and experts now are saying a turnaround looks further away.

One week before the hijacked jets hit the World Trade Center and the Pentagon, the National Association of Purchasing Management released a better-than-expected August manufacturing activity report. The index rose to 47.9 percent from 42.6 percent in July, while economists were expecting a slight decline.

That news was a ray of hope to manufacturers that experts said had given up on a third-quarter recovery but were optimistic about the fourth quarter and 2002.

"Manufacturing has already been in an a recession ... but we were looking for a fourth-quarter turnaround," Hank Cox, director of communications for the National Association of Manufacturers, told CNNfn. "With the interest rate cuts, tax cuts, and (the fact that) many manufacturers had gone through their inventory set us up for a reasonable recovery."

"The terrorist attacks are going to make a bad situation even worse," said Steven Wood, economist at FinancialOxygen.

Wood pointed to the airline sector as having immediate impact on manufacturing as a whole.

A number of major airlines are requesting aid from Congress, but even with a bailout package schedules will be reduce and 100,000 layoffs still look likely. In response to the airlines' troubles, Boeing Co. (BA: Research, Estimates) said it will need to lay off between 20,000 and 30,000 workers.

"With the airlines reducing schedules, we've already seen that cascade back on airline manufacturers like Boeing," Wood said. "And that has cascading effects on hundreds, if not thousands, of vendors who supply parts and components to Boeing."

"There is going to be a huge ripple effect on this," he said.

Some manufacturers already are feeling the effect of transportation troubles.

The NAM's Cox said many of the organization's members are reporting trouble with air delivery and bottlenecks at the Canadian border for supply deliveries.

Seven analysts from ABN-Amro said in a joint research note released Sept. 17 they anticipate "transportation and infrastructure-related disruptions could negatively affect just-in-time manufacturing, implying that whatever products might be ordered could have lower profitability characteristics."

Prospects for the future

Analysts and economists said the future of the manufacturing and industrial sector remains cloudy, as the full effect of the attacks has yet to be realized.

The ABN-Amro note, which covers 43 industrial manufacturing and technology companies, said the crisis could mean worldwide weakness persisting longer than expected and "as is often the case during periods of uncertainty, companies could be reluctant to commit to capital expenditures."

"Bad economic times don't last forever and the U.S. economy is very vibrant," FinancialOxygen's Wood said. "But at this point that is just pure forecast."

"The main reason for (uncertainty) is that the events are too recent and we don't have any data and we are still seeing the negative impact of this," he added.

The last major economic indicator for manufacturing was the Federal Reserve's report on industrial production on Sept 14. The Fed reported industrial production fell 0.8 percent from July to August, the eleventh straight drop and the longest such stretch since 1960.

The next indicator that may be helpful is the Chicago Purchasing Managers Index, scheduled for Sept. 28, but the index surveys conditions only in the Chicago area.

Next month eyes will be on the NAPM report and the Fed's industrial production index.

In the long-term, the NAM's Cox said, he is still optimistic but more help from the Federal government would be appreciated.

He said the Fed has gone the extra mile, as has Congress, but moves such as removing the burden of the alternative minimum tax would help even more.

"This has really been a punch that we've taken and the economy is reeling and we've got to get back up," he said. graphic