(FORTUNE Magazine) – A month after terrorists destroyed the Twin Towers, it's far from business as usual in lower Manhattan. Car traffic is still limited, and the pedestrians on whom most small businesses relied aren't shopping; more often the streets are filled with gawkers. When Maiden Lane, a narrow street that dead-ends into Ground Zero, is closed, Peter Muscat gets no customers at his liquor shop. Many of lower Manhattan's 14,000 businesses are in the same dire straits. "We were closed for about ten days," says Marvin Rafeld of Fourteen Wall Street Jewelers. "We reopened, and it was dismal. There's no other word for it."

New York was already shaky economically when the hijackers struck. Unemployment rose from 5% to 5.8% in August, and growth lagged to its slowest rate since 1994. Then came Sept. 11. "Basically," says James Parrott, chief economist at the Fiscal Policy Institute, "New York lost a year's worth of growth. You have to go back to the Depression to get an effect that pronounced."

A few grim numbers amplify that assessment. The hotel industry has laid off 3,500 people. Wall Street lost $160 million in trading commissions alone. The cost of just the physical destruction could reach $34 billion. More than 100,000 people will lose their jobs because of the terrorists. Those who cannot find new jobs will turn to the city for relief, at a time when its budget deficit was projected to balloon to $3.3 billion in fiscal 2002, and $2.8 billion a year from 2003 through 2005. (For a portrait of the U.S. economic situation, see "War and Recession.")

Yet the truly remarkable thing is that New York can take it. There are far more reasons to be optimistic than gloomy about the city's recovery. With a gross city product of $373 billion, New York is coming off some of the best years in its history. Even bond traders, hardly the fuzziest sorts, seem to think so. On Oct. 2 the city sold its first bonds since the disaster; in an unmistakable vote of confidence (or patriotism), the $1 billion issue was oversubscribed in two hours. The city's credit rating is solid. Broadway is back, with sales and attendance for the week ending Oct. 7 higher than for the week before the attack. Hotels, which were more than half empty in the aftermath of the attack, are now about two-thirds full--the highest occupancy rate in the country. Amazingly, in only 15 trading days in September, the New York Stock Exchange set a monthly record for volume.

As for Wall Street, the early indication is that financial services will stick with the city. Of the 45,000 securities workers displaced by the Sept. 11 events, 25,000 were relocated in Manhattan by mid-October. Many will stay in midtown even after the rubble is cleared downtown, and more back-office work will be shipped to New Jersey--trends that have been discernible for years. Manhattan will lose jobs but will continue to be the core of the global economy.

Most important, New York hasn't lost the attitude that made it the city the rest of America loved to hate. New York is New York because it attracts many of the smartest in fields ranging from abstract art to zoology. The city would be in real trouble if it began to experience an exodus. That's not happening. Real estate is holding steady, and in a deeply unscientific but nevertheless thought-provoking survey of immigrant communities along the No. 7 subway line, which runs from Times Square to the outer reaches of Queens, few reported second thoughts about choosing New York as a place to live. Says Lee Koo Tang, a 45-year-old grocer born in Korea: "New York is my city, and my family is used to everything here. Why should I leave?"

So how long will it take for New York to return to something resembling normality? After the 1994 earthquake in Los Angeles, which caused $40 billion in damage, the city was on its way back in a matter of months--in large part due to federal aid. New York has been promised $17.5 billion and will probably get more (but not the outrageous $54 billion it requested); the payment of $21 billion in insurance claims will provide another fiscal boost. But Sept. 11 was a man-made disaster, notes Felix Rohatyn, who played a key role in helping the city recover from its self-inflicted fiscal wounds in the 1970s, and that carries a psychological cost that makes drawing parallels difficult. "Tell me what is going to happen in Afghanistan and what the national economy is going to do and when people will start to fly, and I'll tell you how long for recovery," he says. "The notion of predicting anything is unrealistic."

On the ground in lower Manhattan, normality still feels far away. "This is a federal crime scene," notes Kathryn Wylde, president of the New York City Partnership, an agency that draws business into the city. "It still smells of smoke, and people go around with masks on their faces." Wylde's momentum is stalled when her car is stopped at a police checkpoint. Barely skipping a beat, she goes on, "Half the businesses still don't have telecoms, and there is no schedule for when they will." As if to punctuate her tale of woe, police stop her again. "Downtown will be vibrant again.... It just feels hard right now."

REPORTER ASSOCIATES Julie Schlosser, Michael Chen

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