September 16, 2001

THE ECONOMY

A Gradual Slowdown Suddenly Becomes a Wrenching Halt

By DAVID LEONHARDT and LOUIS UCHITELLE

he attacks that destroyed the World Trade Center towers and damaged the Pentagon brought the American economy to an unprecedented halt and made a recession far more likely than before.

Six days ago, the economy seemed to be at best stagnant. Now, as a result of last week alone, many experts believe that it is already contracting, perhaps by as much as an annual rate of 1 percent.

The immense loss of output — from airline travel, Wall Street brokerage fees and retail sales — will reduce corporate profits that were shrinking rapidly. That, in turn, could lead to a fresh surge in layoffs, economists said. Even as Wall Street prepares to reopen, the terrorist attacks and the possibility of reprisals are likely to aggravate the unwinding of consumer confidence that was already under way.

In hopes of preventing the situation from worsening, the Bush administration and Congress suspended all talk about preserving the Social Security surplus and quickly enacted a $40 billion spending bill — half for battling terrorists, half for helping their victims. More will come later, policy makers said. The Federal Reserve is also prepared to cut interest rates again.

The government's goal, like that of those rushing to open the stock market, is to restore a semblance of normalcy and keep a staggering economy from turning into something much worse.

What makes it hard to gauge the effect of the attack is a lack of precedent. "We can only speculate, because we've never seen anything like this before," said Carl B. Weinberg, the chief economist at High Frequency Economics, a consulting firm in Valhalla, N.Y.

Still, individual events, even enormously tragic ones, usually have only a temporary effect on major economies. Economists do not question whether the American economy will recover from last week's attacks. The disagreement is over how quickly and strongly it will rebound.

"People like ourselves often tend to exaggerate the economic effects" of individual events, said John Walker, chief economist at Oxford Economics, a consulting firm in the British city for which it is named.

It would be hard, however, to exaggerate what happened last week. For a while, American business was paralyzed as never before. People simply stopped working.

The executives of Dannon, the food company, who had flown to Florida for their annual conference, cut short their sales meeting and chartered a bus to drive them home to suburban New York. In Cincinnati, the 180 stores of the Kenwood Mall closed. In Seattle, the fishmongers at Pike Place Market stopped their famous ritual of throwing fish through the air to amuse tourists. And across the United States, in the stores that remained open, many people behaved as they did at a Barnes & Noble (news/quote) bookstore in Bend, Ore. — venturing out not to shop but to talk with one another and to seek comfort.

The skies were empty of commercial airliners, factories canceled shifts, sports leagues postponed games, Broadway theaters went dark, financial markets closed, jaunty advertising diminished and truck drivers pulled off highways to watch the tragedy unfold on television at roadside rest stops. Even on Friday, three days after the terrorist attacks, the worst in the nation's history, America was still in the process of getting back to work.

"As long as there is shock and grief, your mind is somewhere else, and not on buying a new car, or on fixing the bedroom and kitchen, or on anything that requires an effort out of the routine," said Daniel Yankelovich, chairman of DYG, a public opinion polling company. "The question is how long does it take to get over the shock and grief, and if you are not personally touched by this tragedy, that is probably two or three weeks."

Two or three weeks can produce enough damage, economists say, to postpone the rebound that many forecasters had expected by Christmas and to tip an already weak economy into recession. With the unemployment rate already having spiked to 4.9 percent last month, from 4.5 percent, jobs are particularly vulnerable.

Virtually no executives mentioned layoffs last week. On the contrary, companies embraced and comforted their workers, and the downsizing announcements that had proliferated through Monday — there were a dozen on that day alone — shrank to only two for the rest of the week, a survey by Challenger, Gray & Christmas, the outplacement firm, showed.

But many managers face an even greater profit crunch now than they did a week ago, forcing thoughts of job losses eventually. "Cutting staff has to be an issue in everyone's head," said Earnest W. Deavenport Jr., chairman of the Eastman Chemical Company (news/quote), "but it is much too early to speculate on that."

Lawrence Bates, a Cincinnati businessman, is already concerned. He founded and still runs a 15-person operation, now a subsidiary of NetSetGo, that helps corporate clients buy computer systems and use the Internet. His two sales representatives normally bring in two or three new orders a week, a flow that Mr. Bates says he must maintain to keep his staff fully employed. Last week, however, for the first time in years, there was no new business.

"Our sales people are out there, but no one wants to do business," he said. "The conversations are only about what happened in New York. I don't expect this to continue, but without new business we can go for only a week or two longer without layoffs."

As a result of the terrorist attacks, security is proliferating, and that is becoming a drag on efficiency, further slowing the economy. The Toyota (news/quote) assembly plant in Georgetown, Ky., halted production Friday night, idling 8,000 workers, because three tractor-trailers loaded with parts made in Canada were delayed in getting across the border.

"We understand the extra time needed for security checks, but this is starting to have a significant economic impact, and we have complained to our Congressional representatives," said Dennis C. Cuneo, a senior vice president. The border delays reduced production at the Georgetown plant and one in Indiana by 3,500 vehicles last week, or 15 percent of the usual run at Toyota's three American assembly plants.

By the end of last week, many businesses had returned to near normal operations, although shopping remained subdued, retailers said. And several once-optimistic forecasters shifted on Friday to the view that the economy might continue shrinking into the fourth quarter.

If the gross domestic product, a measure of the value of all the output of goods and services, shrinks in the third quarter, as many economists now expect, it would be the first quarterly decline since 1993. The economy would be in its weakest condition since the recession of 1990- 91. Many people define a recession as two consecutive quarters of contraction.

In the second quarter of this year, the economy grew just 0.2 percent, according to the government's latest estimate. And now the spending that made even this meager growth possible is at risk.

http://www.nytimes.com/2001/09/16/business/yourmoney/16ECON.html

-- Martin Thompson (mthom1927@aol.com), September 15, 2001

Answers

This has to be a real kick in the gut for productivity, which was falling anyway.

-- Wayward (wayward@webtv.net), September 15, 2001.

With the announcement just a few days ago that industrial production took another tumble in August--even before this catastrophe happened--it can only exacerbate the problem. If the stock market had been open, it would have tumbled again, on this news alone.

-- Uncle Fred (dogboy45@bigfoot.com), September 15, 2001.

To me, worst news of the week in the financial markets was when the 2-year note rate dropped to 2.88% on Friday, lowest in 43 years. We are fast going the way of Japan.

Has anybody looked a their money market rate lately? I cringe at the thought of having to look at mine on my next statement.

-- JackW (jpayne@webtv.net), September 15, 2001.

...because three tractor-trailers loaded with parts made in Canada were delayed in getting across the border.

On Wednesday, the waits at the border for truckers heading south from Canada ranged from 12 to 18 hours. And the same is happening in reverse--parts required for the manufacture of oilfield equipment here is being delayed much longer than it was during the summer, and that wait was bad enough! In short, production is slowing phenomenally. Not good news for the oil industry.

-- Rachel Gibson (rgibson@hotmail.com), September 15, 2001.