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How bad is the economy?
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October 17, 2001: 5:51 p.m. ET
It's unclear now, but some of the fog should lift in coming weeks.
By Staff Writer Mark Gongloff
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NEW YORK (CNNmoney) - It's not too comforting when the chairman of the Federal Reserve is uncertain about the economy -- but that's pretty much what happened Wednesday.
Alan Greenspan, speaking before Congress about the effects of last month's terror attacks on the U.S. economy, said that, though the long-term prospects are good, it's still too soon to gauge just how much trouble the economy faces in the short run.
"Nobody has the capacity to fathom fully how the effects of the tragedy of Sept. 11 will play out in our economy," Greenspan said in remarks prepared for delivery to the Joint Economic Committee of Congress. But he also said the picture should begin to clear up in coming weeks.
So what are the key indicators to watch for? In particular, the Fed will keep an eye on retail sales data between now and its next policy meeting, scheduled for Nov. 6. Retail sales, a red-light indicator of how consumers are feeling, plunged immediately after the attacks. They've since rebounded to pre-Sept. 11 levels, according to the Bank of Tokyo-Mitsubishi, which tracks sales trends, though consumers are still shying away from committing to big-ticket luxury items.
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CNNfn's Tim O'Brien reports on Greenspan's congressional testimony.
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Economists will also look to the Labor Department's unemployment rate and job-cut report for October, due Nov. 2, along with weekly unemployment claims, to see just how bad the labor market has gotten. Job cuts, already plentiful following a year-long economic slowdown that hurt corporate profits and production, accelerated after the attacks, especially in the airline industry.
Mounting job cuts could weaken already shaky consumer confidence, making the Conference Board's consumer confidence index, due on Oct. 30, another important indicator. The index, which is based on consumer surveys, plunged dramatically in September -- even though most of the survey responses came in before Sept. 11.
"While consumers have managed to keep the U.S. out of a recession for several years now, that soon may no longer be the case," Lynn Franco, director of the Conference Board's Consumer Research Center, said at the time.
Economists will also watch the University of Michigan's revised consumer sentiment index for October, due Oct. 26. The preliminary report showed a surprising gain in October, raising hopes that consumers were rebounding more quickly than some economists thought they would.
"[The Michigan report] confirms the belief that the weakness in retail sales was the result of a bunker mentality in the wake of the terrible events of Sept. 11," said Anthony Chan, chief economist at Banc One Investment Advisors.
Click here for CNNmoney.com's economic calendar
Consumers are so important to the economy because their spending fuels two-thirds of the nation's gross domestic product (GDP). If they stop spending, a recession -- commonly defined as two consecutive quarters of shrinking GDP -- is all but certain.
Before the attacks, the economy apparently avoided negative GDP growth; even second-quarter GDP was revised ever-so-slightly upward. But third-quarter GDP -- which the Commerce Department is set to report on, appropriately, Halloween -- is likely to be negative.
In fact, most economists expect GDP in both the third and fourth quarters of 2001 to be negative, but they also expect growth to resume by the first quarter of 2002.
To boost consumer spending and help fuel a recovery, the Fed has cut its target for short-term interest rates twice after the attacks, their eighth and ninth cuts of the year. Greenspan's remarks Wednesday also were likely intended to lift consumers' spirits.
Most economists expect the Fed, which has already slashed overnight bank lending rates to 2.5 percent from 6.5 percent, to cut rates again by the end of the year. Cutting rates makes borrowing cheaper, but it also reassures people of the Fed's diligence in shepherding the economy.
In addition to the aggressive rate cutting, Americans will likely see stimuli in the form of tax cuts and increased government spending. President Bush and Congress are working out the details of such a stimulus package, which could cost more than $50 billion.
"Activity will remain at very low levels in the immediate term, and the risks are tilted heavily towards the downside," said Salomon Smith Barney economist Christopher J. Wiegand. "However, the amount of stimulus now in motion is potentially explosive."
But there are some big unknowns in this equation, big enough that they could throw the economists' fairly rosy two-quarter recession scenario into doubt.
If the U.S. military campaign to root Osama bin Laden and his Al Qaeda network out of Afghanistan does not go well, if another nightmarishly big terrorist attack such as those on Sept. 11 takes place, or if the threat of anthrax begins to spread, then consumer confidence could sink even further.
"Before the recovery process gets under way, stability will need to be restored to the American economy and to others around the world," Greenspan said Wednesday.
Recovery from a year-long slowdown in the broad economy seemed imminent in the days before the attacks, Greenspan said, as consumer spending held its strength and the decline of corporate profits appeared to be slowing down.
The attacks changed all that, practically shutting the economy down for days as consumers "stayed riveted to their televisions and away from shopping malls," as Greenspan put it, and a shutdown in air travel and shipping dealt a blow to manufacturers who kept very little raw materials on hand.
The subsequent uncertainty has caused consumers and businesses to temporarily cut back on their spending, Greenspan said, but the prospects for technological advancement and productivity growth were unchanged by the attacks on New York City and Washington, D.C.
"The foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past," he said. 
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U.S. housing starts rise 1.7 percent - Oct. 17, 2001
Retail sales fall in Sept., but sentiment stronger in Oct.; PPI rises - Oct. 12, 2001
Attacks quash September sales - Oct. 11, 2001
Jobless claims fall, lower than expected - Oct. 11, 2001
Unemployment rate steady in September, but job cuts soar - Oct. 5, 2001
Federal Reserve cuts interest rates for 9th time in 2001 - Oct. 2, 2001
2Q GDP revised slightly upward - Sept. 28, 2001
Greenspan, Rubin, Senate leaders discuss boosts for economy - Sep. 25, 2001
U.S. consumer confidence falls - Sep. 25, 2001
U.S. leading indicators fall in August; first drop in five months - Sep. 24, 2001
Fed Chairman Greenspan sees long-term strength in U.S. economy - Sep. 20, 2001
Recession could follow terror attacks, but it might not last long - Sep. 20, 2001
Prices show small gain in August - Sep. 18, 2001
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