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Short recession likely
September 20, 2001: 12:39 p.m. ET

Many economists expect recession in wake of attacks, but it could be short
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - Most economists think last week's terror attacks will tip the world's largest economy into a recession, if it wasn't there already, but the downturn probably won't last long.

"We were right on the cusp, and I think this pushes us over the edge," said Robert Macintosh, chief economist at Eaton Vance Management, using language heard often from economists in recent days. "But I do think it will be shallow and short."

The U.S. economy, as measured by gross domestic product (GDP), grew at a feeble 0.2 percent annual rate in the second quarter. For the most part, consumer spending kept the economy growing, counteracting a manufacturing recession and a slowdown in spending by businesses.

But economists think consumers will react negatively to the terrorist attacks on Sept. 11 that destroyed the World Trade Center in New York, damaged the Pentagon in Washington, D.C., caused the crash of an airliner in rural Pennsylvania and likely killed thousands of people.

"Consumer confidence numbers will most likely plummet in September," said Kathleen Camilli, chief economist with Tucker Anthony.

Others weren't so sure, hoping Americans will respond to calls that buying something anything was their patriotic duty.

"The crucial question is: What does the consumer do now?" said John Davidson, chief investment officer at Circle Trust. "The answer will take some time to determine."

Click here for's economic calendar

Even before the attacks, there were signs that a year-long downturn in the rest of the economy resulting in hundreds of thousands of job cuts and an unemployment rate that jumped in August to 4.9 percent was beginning to take its toll on consumer confidence.

The Federal Reserve's "beige book" report, released Wednesday, reported sluggish consumer spending in the weeks before the attacks. But Fed Chairman Alan Greenspan, testifying before Congress Thursday, contradicted that report, saying consumer spending actually grew in August and early September.

In the days after the attacks, anecdotal evidence painted a mixed picture of America's reaction. On one hand, a Circuit City (CC: down $0.22 to $10.18, Research, Estimates) store in Manhattan was packed with shoppers this past weekend.

On the other hand, companies from American Express Co. (AXP: up $0.20 to $26.20, Research, Estimates) to Viacom Inc. (VIA: down $1.62 to $29.78, Research, Estimates) have warned that the attacks are going to hurt their bottom line.

"There's a lot of uncertainty about the outlook," said Henry Willmore, chief economist at Barclays Capital. "There are a lot of risks, mainly downside risks."

Especially hard-hit will be the airline and tourism industries. Airlines, stung by nervous travelers canceling flight plans and tighter security measures slowing down schedules, have already cut tens of thousands of jobs. Disruptions in the airline industry could be felt throughout the economy, slowing down the transportation of vital people and supplies.

Together, the transportation and recreation sectors make up about 5.3 percent of U.S. GDP. If GDP is already weak, a big hit in these sectors alone could tip the economy into negative territory.

If second quarter GDP is revised into negative territory on Sept. 28, as some expect it will be, and GDP is negative in the third quarter, then the common definition of a recession -- two straight quarters of a shrinking economy -- will be met.

In fact, a survey of 52 economists, conducted Wednesday by Aspen Publishing Inc., publisher of Blue Chip Economic Indicators, found 82 percent think the economy is in a recession, but about 80 percent think it will be no worse than the recession of 1990-1991. Most expect GDP to pick up again in the first quarter of 2002.

"The events of this week make a more pronounced v-shape in the downturn," said Camilli of Tucker Anthony. "While obviously this will have a very short-term negative impact on us, investors should be focused on the next six-to-nine months."

The economists echo Greenspan's testimony, in which he said the economy faced a short-term impact, but would hold up in the long run.

Click here for more on the Fed and rates

The Fed cut its target for short-term interest rates for the eighth time this year on Monday to 3.0 percent, the lowest level since September 1992. The cut was mostly an effort to keep stock prices from plunging on their first day of trading after a four-day hiatus.

Fed Chairman Alan Greenspan testified before Congress Thursday.
The loss of wealth in the stock market more than $500 billion in equity value disappeared on the day trading resumed could have a big impact on consumer spending.

"The Fed can and will be much more of an active player in the stock market until it turns the corner," said Ian Shepherdson, chief economist at High Frequency Economics Ltd.

Aside from a psychological boost, the Fed's cuts could have little or no real impact on consumers for several months, as long-term rates on debts such as mortgages have stopped falling and consumers have already taken on record levels of debt.

"The problem is, the private sector doesn't have the balance-sheet capacity to take on more debt, and the banking system is not in a position to extend more credit," said former Fed economist Lacy Hunt, now chief economist at Hoisington Investment Management Co. "So monetary policy may not work at all."

Government likely to boost economy

Balancing this gloomy scenario is the prospect of economic stimuli as the country rebuilds and girds itself for a protracted war on terrorism.

President Bush has already signed a $40-billion relief package and is expected to give billions more to the airlines. The Fed is likely to cut rates again at or before its next policy meeting, scheduled for Oct. 2, and Congress is exploring other ways to stimulate the economy.

Rebuilding downtown New York will be a multibillion-dollar project.
"With so much help on the way, I have less doubt now than I've ever had in my career that we're going to turn this around," said Chan of Banc One. "Any recession would be a purely technical recession, clearly not due to fundamental factors."

Other stimuli could include construction and information-technology spending in downtown New York, private-sector spending on security measures, and government spending on the military. Unfortunately, these boosts have caveats that could lessen their impact.

Unlike the rebuilding of south Florida after Hurricane Andrew in 1993 when houses, stores and offices were rebuilt immediately, pouring $25 billion into the economy in one quarter it could take years for New York to rebuild the World Trade Center area.

"This isn't going to be settled overnight," Hunt said. "In New York, there will be debris removal and shoring up subway lines, but not massive reconstruction. People will use up the extra space available in New York, New Jersey and Connecticut. That doesn't mean they're going to be building new buildings."

Guns or butter

Some economists think a war could boost a sluggish economy, as it did in World War Two.

But the military response to the attacks is unlikely to be a massive invasion such as the Gulf War. More likely are small-scale operations against Osama Bin Laden and other terrorist leaders and terrorist-friendly governments and tactical strikes against specific targets, according to Michael O'Hanlon, senior fellow of foreign policy studies at the Brookings Institution.

O'Hanlon estimated the cost of such operations to the government could run about $1 billion a month for the duration of the conflict.

"When you add up the different pieces, there's good news and bad news," O'Hanlon said. "The good news is: It's not a huge operation; maybe 50,000 people at maximum. The bad news is: It may not work any time soon." graphic


Special report: Eyes on the Fed

Fed Chairman Greenspan sees long-term strength in U.S. economy - Sep. 20, 2001

American parent and United to cut 20,000 jobs - Sept. 19, 2001

Fed's 'beige book': weakness continued in August - Sept. 19, 2001

CBS owner Viacom cuts 2001 outlook - Sept. 19, 2001

Stocks fall to 3-year lows - Sept. 17, 2001

Fed cuts rates a half percentage point - Sept. 17, 2001

American Express assesses WTC impact - Sept. 17, 2001

U.S. economy relying on consumer spending in wake of attacks - Sept. 13, 2001

U.S. spending slows, income rises; jobless claims dip - Aug. 30, 2001

GDP grows at 0.2 percent in 2Q - Aug. 29, 2001

U.S. consumer confidence drops - Aug. 28, 2001

  RELATED SITES - Airline aid bill may hit Congress this week - Sept. 19, 2001 - Congress approves resolution authorizing force - Sept. 15, 2001

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