The economy: Six months later
Optimists said the economy would bounce back. They were right.
March 10, 2002: 8:00 a.m. ET
By Staff Writer Mark Gongloff
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NEW YORK (CNN/Money) - In the hours after the Sept. 11 attacks, many observers said the fate of the U.S. economy rested in the hands of consumers. Would they overcome their shock and keep the economy from collapsing into a long recession?
Six months later -- with economists beginning to debate whether or not the United States experienced a recession at all -- it's clear that consumer spending did indeed save the day, with encouragement from the Federal Reserve and U.S. businesses that bent over backwards to entice people to spend.
"The economy's performance since Sept. 11 has been extremely resilient and based on unshakeable consumer confidence," said Lara Rhame, economist with Brown Brothers Harriman.
Just six months after the worst terrorist attacks in U.S. history, Greenspan already has declared the recession to be over, Treasury Secretary Paul O'Neill has said there was never even a recession to begin with, the unemployment rate has fallen two months in a row, and the beleaguered manufacturing sector is growing again.
Fed, automakers to the rescue
Greenspan and Fed policy makers should get much of the credit for fueling the recovery. In order to deal with the short-term impact of the attacks, including dramatic drops in consumer confidence and spending and stock prices, the Fed on Sept. 17 cut its target for short-term interest rates by half a percentage point.
Spending and stocks plunged anyway, but the Fed kept cutting, slashing rates three more times in 2001 to levels not seen since 1961.
Meanwhile, U.S. businesses scrambled to offer incentives to consumers to encourage spending. General Motors Corp. (GM: Research, Estimates) was the first automaker to offer zero-percent financing on its vehicles, and its competitors soon followed suit, giving sales a shot in the arm and offering a model for other businesses.
Still, personal spending initially was slow to respond, growing just 1.0 percent in the third quarter and allowing gross domestic product (GDP), the broadest measure of the economy, to shrink for the first time in more than eight years.
And unemployment, which had been relatively steady throughout 2001, soared after the attacks, with companies cutting 165,000 jobs in September and 448,000 jobs in October -- making it the worst month since May 1980.
Nevertheless, fueled by the Fed and buying incentives, spending exploded 6.0 percent in the fourth quarter, lifting GDP into positive territory and helping the economy avoid a technical recession, commonly defined as two straight quarters of shrinking GDP.
"The resilient consumer and an attempt by businesses to jump-start and keep the economy going -- the combination of those two forces gave us a bounce-back in economic activity," said Anthony Chan, chief economist at Banc One Investment Advisors.
Also fueling the quick recovery were U.S. government spending on emergency relief and the conflict in Afghanistan, surprisingly low energy prices, and low long-term interest rates that fueled a boom in mortgage refinancing and a red-hot housing market.
Rising home equity improved consumer balance sheets and eased the sting of the plunge in equity prices. And even stock prices recovered their strength, eventually moving above pre-Sept. 11 levels.
Did Sept. 11 make the recession worse?
Most economists, including Greenspan, argue the economy was stabilizing right before the attacks.
"[Our] forecast had been all along that we would come close to a recession but sidestep it," said Wayne Ayers, chief economist at Fleet Boston Financial Corp. "Along came Sept. 11, and all bets were off. This recession has been so shallow and will prove to be ... the shortest on record; the shock of Sept. 11 is what did us in."
But some economists think the economy would have fallen into recession even without the shock of Sept. 11. After all, it already had been in the doldrums for several months, and its underlying problems -- especially a near-freeze in business spending after the boom of the late 1990s -- were not created by the terror attacks.
What's more, it seemed just before the attacks that the Fed was getting ready to stop cutting rates. With consumer debt rising and job cuts mounting, it's possible that consumers could have just stopped spending -- as they do in most recessions -- and cleaned house until the economy picked up again without the carrots dangled by the Fed, GM and others.
"It's fairly safe to assume that, if not for Sept. 11, the Fed wouldn't have cut rates as much as it did," said EIU's Gerald Walsh. "Without Sept. 11, maybe car producers would not have been panicked into making such major price cuts."
Nevertheless, the attacks still are producing headwinds for the economy, most noticeably a heightened level of uncertainty, increased security costs and a lingering slump in the tourism, travel and service industries.
If anything's clear, it's that it could take years to accurately judge the impact of Sept. 11 on the economy.
"Probably the easiest way to think about the Sept. 11 event is to think of bouncing a ball off the roof of a garage onto the driveway," said Rhame of Brown Brothers Harriman. "The ball's bouncing around, and it's still unclear what the slope of the driveway is. But we can be fairly sure it's sloping up." 
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