Headline: Some See Recession as Imminent After Terrorist Assaults

Source: New York Times, 14 September 2001

URL: http://www.nytimes.com/2001/09/14/business/14ECON.html

Citing new figures suggesting that the economy was tipping into recession even before the terrorist attacks on Tuesday, economists said yesterday that the ripple effects from the assault would almost surely bring to an end the record-setting expansion that began more than a decade ago.

Though many Americans were slowly returning to work and to normal shopping patterns, car dealers reported that their lots were empty, real estate agents said buying had slowed, and deal makers said corporations had put off just about every major decision. "Even the traffic past the dealership, the car count, is down," said Raymond J. Scarpelli Jr., owner of two Chevrolet dealerships in northern Illinois.

Eric Wittenberg, the president of McStain Enterprises, a large independent home builder in Colorado, said: "The uncertainty of the attacks and the uncertainty of how we're going to respond to them is going to weigh heavily on consumers' minds. We're expecting it to be a tougher selling environment for a while."

In an effort to kickstart the economy and forestall a sharp downturn, the government weighed a variety of options yesterday, with Congress beginning to talk of new spending and tax cuts and with pressure mounting on the Federal Reserve to cut interest rates again soon.

Figures released yesterday showed that consumer confidence was already plunging last week and over the weekend as it became clear that unemployment had surged in August. And there were indications yesterday that people were continuing to lose jobs at a rate higher than expected at the beginning of this month.

Combined with data suggesting that August was a much worse month economically than analysts had expected, the new figures covering the first week or 10 days of September indicated that the economy had entered perilous territory by Tuesday, leaving it highly vulnerable to the chaotic swirl of aftereffects of the attacks on the World Trade Center and the Pentagon.

"The economy was struggling mightily to keep its head above water before this event," said Carl Tannenbaum, an economist at LaSalle Bank/ABN Amro, who was in a hotel ballroom near the World Trade Center towers during the attacks. "What we've seen since suggests this is enough to tip us over into recession."

While the stock market was still closed — regulators said it would be back in business on Monday — the bond market reopened yesterday, giving the first real hint of investor sentiment. Prices on government bonds surged, with investors seeking a safe place to park their money as the air of deepening economic pessimism mixed with shock and despair.

The Federal Reserve continued to pump money into the financial system, hoping to reassure investment firms and banks that plenty of money was available to help them through any problems that might crop up as the markets begin operating again.

The Federal Reserve Bank of New York injected $70.2 billion into the system by buying government securities from bond dealers, one of the biggest such operations in memory. On a normal day, the Fed buys or sells a few billion dollars of securities; on Wednesday, in the immediate aftermath of the attacks, it bought $38.25 billion of securities from dealers. The Fed also said it had agreed to an arrangement with the European Central Bank under which it will make a $50 billion credit line available to European financial institutions operating in the United States. The agreement is intended to make sure that European banks have access to any money needed to carry them through a temporary financial squeeze, should banks and investment firms have trouble making or receiving payments or settling up for securities trades.

Analysts said the Fed would almost certainly reduce interest rates more aggressively, and keep them low for longer, than it otherwise would have. There was widespread speculation, although no concrete evidence, that Alan Greenspan, the Fed chairman, would consider cutting rates well before the central bank's next scheduled meeting, on Oct. 2.

In Congress, Republicans started drafting plans for a package of fiscal stimulus, including business tax breaks and a reduction in the capital gains rate. Democrats said that they were not sure of the package's fate but that Congress was more likely to agree on further fiscal stimulus than it would have been a few days ago.

Both parties have informally agreed that the main constraint on tax cuts and spending — their pledge not to use any of the Social Security surplus — should be set aside for the duration of the military and economic crisis.

Foreign markets remained relatively stable yesterday, as did the value of the dollar. But economists said they were disappointed at the decision of the European Central Bank yesterday not to cut interest rates. "This has to be a period of very aggressive actions by the Federal Reserve Board and by Congress and the administration," said Mark Zandi, an economist at Economy.com. "They need cooperation from European and other central banks."

In the United States, policy makers said little of substance yesterday. A scheduled speech in New York by Lawrence B. Lindsey, President Bush's chief economic adviser, was canceled. Treasury Secretary Paul H. O'Neill appeared briefly before reporters but took no questions. Roger W. Ferguson Jr., the vice chairman of the Fed, told reporters on Capitol Hill that the central bank would continue to provide the financial system as much liquidity as it needed.

"We've suffered quite a blow, but the financial systems have proven themselves to be quite resilient," Mr. Ferguson said.

Economic indicators released yesterday underscored the difficulty that policy makers will face in keeping the economy from developing much deeper problems. A survey of consumer confidence conducted by economists at the University of Michigan registered a sharp drop early this month to its lowest level since 1993. The researchers said preliminary figures showed the index dropping to 83.6 from 91.5 in August.

The drop encompassed consumers' assessment of two more specific questions the survey asks regarding current economic conditions and expectations for the future. The index of current conditions fell to 93.5 from 101.2 in August. The index of consumer expectations fell to 77.2 from 85.2.

Richard T. Curtin, the survey's director, said much of the fall in the indexes appeared to be related to the news that unemployment had surged in August to 4.9 percent, from 4.5 percent a month earlier. "Before Tuesday morning, the outlook was already weakening," Mr. Curtin said. "Following the terrorist attack we would expect an even weaker outlook, and the possibility the economy will fall into an outright recession has grown substantially."

Suggesting that unemployment and consumer sentiment could deteriorate, the number of workers filing initial claims for unemployment rose by 21,000 last week, to 431,000, well above what economists had expected.

Janet Yellen, a former Fed governor, said the big question for the economy now was whether consumers "will sit home glued to the TV, feeling that life has become uncertain and it's not a good time to buy a car or a refrigerator." "If they decide that," she said, "it throws us into a recession."

Business was light but picking up at Briarwood, a large indoor shopping mall in Ann Arbor, Mich. The Nine West outlet was empty at about 3:15 p.m., but J. Crew had a handful of shoppers. Kay Jewelers was empty, but several customers were getting manicures at a salon nearby. "It's slower than normal," said Joe Weiss, a salesman at a Verizon Wireless kiosk. "Business has picked up today. No new customers yesterday. I know when I'm at home I've been watching TV for the last few days." Many shoppers in the mall, which closed early on Tuesday but reopened on Wednesday, said they had been absorbed by events but continued to shop.

"It's very scary," said Shirlee Vining, a 54-year-old claims adjuster, who was at the mall to meet her daughter. "But I've heard what the Congress and the president are saying, and I agree that shooting back too fast is not right."

Dick and Rose McCleery, both retirees, said they were shopping for a kitchen floormat. Though they had been watching more television than usual, little about their normal routine had changed. "I feel sorry for young people," Mrs. McCleery said. "I don't think it's near over yet, and something else might happen soon."

David Weekley, owner and chief executive of David Weekley Homes, in Houston, one of the nation's largest privately held home builders, said: "Everyone is still numb. Today, most people like me are operating at 25 percent speed, just kind of numb at the whole situation. It's the kind of time when everybody hunkers down to their roots and pulls back."

The tragedy "could cause people to wait," he said. "It's just an unsure time to move forward with something as significant as a home purchase. I don't think we'll really know for sure how this will affect us until the first of the year."

Beyond consumers, the confusion surrounding the attacks has slowed business and finance at almost every level. The Campbell Soup Company and the Roadway Corporation, the trucking company, both postponed plans to sell securities to investors. Some big business deals could come unglued, like the already troubled agreement by Hewlett-Packard to acquire Compaq Computer.

Even after the stock market reopens, Wall Street could face difficulties. Investment banks had been hoping that business would pick up after Labor Day to help bolster revenue in a year in which the number of mergers and acquisitions and initial public offerings had already declined drastically. One of the biggest uncertainties for investment banks and their clients now is whether the prices of stock, often used as currency to make acquisitions, will become unstable.

There were signs that consumers were not totally closeted at home. Some retailers reported a near-run on American flags, which sold out in some places. Some grocery stores and retail chains said business was just about typical.

"Business is back to normal today," said Mark Matzen, manager of a Home Depot on Santa Fe Drive in downtown Denver. And Tom William, a spokesman for Wal-Mart Stores, said, "We are having a fairly normal day of shopping."

Indeed, for all the gloom, no one can predict with any precision what effect the attack will have on the economy at home or abroad. Economists said the reopening of the stock market would be a milestone. But other possible factors cannot be assessed yet. Will the United States, and perhaps its allies, become engaged in protracted military action? Will oil prices shoot up? Will Japan's banking system, already suffocating under the weight of a decade's worth of failed loans, be able to withstand the sharp drop in stock prices there?

The closest historical parallel is from 1990, when a weakening economy was hit with a rise in oil prices and a drop in consumer confidence set off by Iraq's invasion of Kuwait and the likelihood that the United States would respond militarily.

The economy did go into recession that time, but the downturn lasted only eight months and was relatively mild, in part because the Fed cut interest rates repeatedly and the war ended quickly.

But it is not clear that the world or the economy will follow the same script this time. "It seems to me," Ms. Yellen, the former Fed governor, said, "that this is a much bigger event."

-- Andre Weltman (aweltman@state.pa.us), September 14, 2001

Answers

Worst part of this report is that the Michigan University's monthly study of consumber confidence took such a big hit--even before the attacks of last Tuesday.

-- Uncle Fred (dogboy45@bigfoot.com), September 14, 2001.

I never saw such a mixed bag, everything from empty car lots to business as usual in malls. What's the real picture?

-- Sparky (case@webttown.com), September 14, 2001.

How could anybody say that recession is anything but imminent now?

-- Big Cheese (bigcheese@multimax.net), September 14, 2001.

It isn't just retailers, is it? How about all the business deals that were put on hold, all the parts deliveries that were not made which had to slow down manufacturers' outputs, and deals that just plain fell through due to the constrictions on air travel? The timeliness of of all these people-to-people connections is important.

-- QMan (qman@c-zone.net), September 14, 2001.