U.S. Business Overview (Sunday's Wash. Post)

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Headline: Collateral Damage: Consumers Key to Direction of U.S., Global Economies

Source: Washington Post, Sunday, September 16, 2001; Page F01

URL: http://www.washingtonpost.com/wp-dyn/articles/A37593-2001Sep15.html

The business headlines stacking up one after another on the Bloomberg News screen late Friday afternoon revealed the extent of the collateral damage suffered by the economy from last week's terrorist attacks:

General Electric Co. lowers profit outlook because of a $400 million insurance loss at the World Trade Center.

Ford Motor Co. shuts several U.S. auto plants because of blocked parts delivery, cutting production by 13 percent.

The dollar hits a six-month low.

Crude oil nears $30 a barrel on spot markets on fears of war in the Middle East.

Industrial production in the United States declines for the 11th straight month.

European stock markets finish their worst week in three years.

The airline industry faces the biggest losses in its history.

In a normal week, any of these developments would have been noteworthy. Taken together, they increased the odds that the U.S. economy will fall into recession, taking the rest of the global economy with it. After months of falling stock prices, declining exports and collapsing business investment, the only thing that had been keeping the economy growing was the continued free-spending ways of the U.S. consumer. Now, to many economists, it seems likely that consumers will lose confidence and begin to pull back.

"This week's tragedy could well be the tipping point to the recession of 2001," Stephen Roach, chief economist at Morgan Stanley Dean Witter & Co., warned from Italy on Friday, where he was waiting for flights to resume to the United States. "The economy didn't have much momentum before, so you have to assume this will be the final straw in terms of sustaining consumer confidence," said Neal Soss, chief economist at Credit Suisse First Boston. "I now think we'll have a short, mild U.S. recession."

"A week ago, I thought the odds of an outright recession to be pretty low," said Alan Blinder, a Princeton University economist and former vice chairman of the Federal Reserve Board. "Now I don't think that."

By Friday, in fact, Congress, the Federal Reserve and the Bush administration were moving with Roosevelt-like urgency to prevent an economic rout.

Congress rushed through an emergency appropriation that will inject $40 billion in additional government spending into the economy, to be used for cleanup and rebuilding in New York and at the Pentagon, providing grants and loans to the airline industry, and financing the new war on terrorism. Officials said it was likely to be only a down payment on a much larger effort.

At the same time, the Fed sought to ensure that the attack on Wall Street would not leave the global financial system temporarily short of cash. It loaned record amounts to primary dealers of Treasury securities, assisted by central banks in Canada and Europe. The Fed also told banks to cut some slack to borrowers who might be short of cash because of disruptions caused by last week's attack, and it promised to open its lending window wide for any banks and brokerage firms requiring overnight loans. Most analysts also expect the Fed to reduce interest rates by another half-percentage point to bolster confidence in financial markets and further stimulate business investment and consumer spending.

Many analysts said these extraordinary steps would offset much of the damage inflicted last week on the economy and keep any recession short and mild. And among a number of officials, economists and business executives, there were even a few arguing that a recession may be avoided altogether if Americans decide to keep spending and investing as an act of defiance in the face of the new terrorist threat.

"The first instinct is to think of this as an event that will shatter confidence, but it is just as likely to go the other way," said economist James Glassman of J.P. Morgan Chase & Co. "I think we'll be surprised how quickly we recover economically." Sidney Harman, chairman of consumer electronics firm Harman International Industries Inc. and a former undersecretary of commerce, also sees a confidence boost arising from last week's "national epiphany."

And Treasury Secretary Paul H. O'Neill, a former industrial executive, dismissed the rising tide of gloom among economists, telling reporters last week that there was nothing inevitable about a recession.

U.S. investors will get their first chance to weigh in with their opinion when stock exchanges resume trading. Some analysts are predicting a "patriot rally" as investors and money managers show the flag by buying up shares. There were also indications from banks and hedge funds that they would refrain from participating in any "short selling" on the options market, which has the effect of putting downward pressure on stock prices.

Others warn that the professional money managers who account for most of the trading are unlikely to get caught up in the excitement if they think a recession will delay the economic rebound they had been expecting later this year.

In the end, however, it won't be investors who decide the direction of the economy so much as the consumers, and history is not particularly encouraging. The last time the U.S. economy faced a similar set of circumstances was after Iraq's invasion of Kuwait in 1990. And while the buildup to the Persian Gulf War was accompanied by an outpouring of patriotic fervor, a sharp drop in consumer spending combined with a spike in energy prices to trigger a recession.

Automobiles In the auto industry, for example, sales fell from an annualized rate of 14 million in July 1990, before Iraq's invasion of Kuwait, to 12 million on the eve of the U.S. attack on Baghdad in January 1991 – and never got much above 13 million for the rest of that year. Industry officials acknowledge they could face a similar scenario as the United States and its allies head for a possible military confrontation in Central Asia.

"We couldn't possibly expect to see a positive impact from this week's events, that's clear," said George Pipas, Ford's sales analysis manager. "The question is how serious the negative impact will be."

Pipas said that the terrorist attack came at a time when consumer confidence was already declining because of rising unemployment and fleet sales were suffering from a slump in car rentals and business investment. Just hours after the attack, Ford announced it would produce 810,000 cars in the three months ending in September, down nearly 20 percent from last year's record quarter.

Retailing Even before last week, retail sales of all sorts were barely growing more than the rate of inflation, despite a tax rebate that pumped $40 billion into consumers' pockets. Shopping-mall traffic had been falling for more than four months, and retailers had pretty much already written off the holiday season, reducing orders and paring hiring plans. Shipping companies reported last week that the spike usually associated with delivery of Christmas goods to retail warehouses hadn't yet materialized.

"It's difficult to say yet how much worse things could get, but it's clear this only reinforces the downward trend," said Mike Niemira, an economist and retail analyst at the Bank of Tokyo who figures that a recession has already begun. Niemira said the retail sector is already losing money because of price cutting and a shift by consumers to lower-priced, lower-profit goods. "When sorrow and sadness and even fear sweep the country, consumers are not likely to care about shopping," said Kurt Barnard, publisher of Barnard's Retail Trends.

Aerospace Apparently they're not likely to hop onto planes anytime soon, either. Sam Buttrick, an analyst with UBS Warburg, now estimates that U.S. airlines will lose $4.4 billion this year, topping the record set during the Gulf War in 1991. With losses mounting daily, some airlines face the prospect of running out of cash over the next six months, Buttrick said, predicting a few may have to file for bankruptcy protection.

Even before last week's disruptions, the airlines had experienced a sharp decline in business and vacation travel. The carriers also face rapidly rising labor costs as generous contracts – signed last year, when the industry enjoyed record profits – take effect. Aerospace industry analysts warn that the financial situation is expected to force the airlines to reduce orders for new planes – and perhaps even defer or cancel the planes they have already ordered. Last week, AMR Corp., the parent of American Airlines, said it would not exercise rights to purchase $1.2 billion of Boeing planes that would have been delivered over the next two years.

Hotels It's a similar tale in the hotel industry, which is now logging in record cancellations. In some cases, the shutdown in air service has made it impossible for travelers to get to their destinations. In others, a newfound fear of flying has emerged. "Most business and leisure travelers are going to be insecure about leaving home," said Jason Ader, a hotel analyst with Bear, Stearns & Co. "They're going to be looking to avoid the airlines, and that means we could continue to see cancellations."

Consultants at PricewaterhouseCoopers now predict that revenue per room will decline between 3.5 percent and 5 percent this year, the biggest decrease since the firm began tracking the data 33 years ago.

With such prospects, hotel construction, which reached 105,000 rooms this year, is expected to drop to half that level by 2003. "You can expect there won't be a lot of big hotels built because no one will give them the money," said Mark Lomanno, president of Smith Travel, an industry research firm in Memphis. That's a lot of lost work for construction workers, electricians and plumbers.

Insurance Another industry turned upside down last week was insurance, which some analysts say could face claims as high as $30 billion as a result of the property damage, deaths, medical costs, and lost wages and business income caused by the terrorist attacks. That would make it the costliest disaster in history. "The scope of this is unprecedented," said Joseph Annotti, spokesman for the National Association of Independent Insurers.

The cost will fall not only on well-known insurance companies such as Chubb, Nationwide and New York Life. Equally exposed are a number of large reinsurance companies – companies that, in effect, insure the insurance companies against extraordinary losses in any year, or from any one event.

With its huge reserves, the industry is expected to be able to absorb those losses. But industry executives warned that the size of the claims against the reinsurers in particular could make it more difficult and expensive for businesses and individuals to get insurance.

"There's no reinsurance to be had until everyone can estimate what the numbers are," said Robert J. Murphy, senior vice president of Franey, Parr & Muha Inc., an insurance firm in Chantilly. "Its going to keep the pricing going upward for an extended period of time."

And that, say economists, is part of the long-term economic costs of last week's attack. All that time and money that businesses will spend beefing up security and insuring themselves against terrorism amount to what Robert Hormats, a vice chairman of Goldman Sachs International, calls a "terrorism tax" that detracts from the efficiency and productivity of the entire economy.

Technology In the battered tech industry last week, there was some hope that the attacks would prompt a rebound in business spending for computers and software. In New York, untold billions of dollars in systems were destroyed, while companies elsewhere were reassessing whether they had sufficient backup telecommunications and computer capacity to get them through a similar crisis. But few analysts believe this can significantly offset the nearly 25 percent decline in tech spending that began precipitously in January, particularly if stock prices and corporate profits fail to rebound.

"If the equity markets go down another notch, the noose around these tech companies' necks will get even tighter," said Mark Zandi, chief economist at Economy.com., a research firm in West Chester, Pa.

John Gantz, chief researcher for International Data Corp. of Framingham, Mass., noted that during 1991, the year of the Gulf War, the growth of tech spending fell by half and did not recover until the next year.

Media While just about everyone spent the week glued to television sets, it hasn't been much of a boon to media company bottom lines. Profits were already in sharp decline because of falling advertising in a weakening economy. And because much of last week's coverage has been offered without interruption for commercials, media analyst John Corcoran of CIBC World Market estimates that the broadcasters and cable networks collectively may be losing as much as $100 million per day.

Federal Contracting The prospect of armed conflict is expected to boost prices for defense stocks when trading resumes on Wall Street. Much of the attention will go to big-name makers of defense hardware like Lockheed Martin Corp. and Northrop Grumman. But in the war against terrorists, a good chunk of the defense dollars are likely to go to some of the less well-known firms in the Washington area that help intelligence agencies gather, store, analyze and sort information gathered by satellites and other sources.

Stephen Fuller, a regional economist at George Mason University, recalled that the increase in federal contracting during the Gulf War provided a significant cushion for the Washington area economy during the 1991 recession. "I anticipate a whole different tempo," said Jack London, chairman of Arlington-based CACI International Inc., citing the urgent shift in priorities. "We'll see longer days, more people working on weekends. Our recruiting will be very active."

Federal spending also will boost the New York area, where billions of dollars will be spent for cleanup and reconstruction. But economists warn that even such enormous sums are not likely to offset the costs of last week's attacks. These include not only lost business for the media, advertising, financial services and tourism industries, but also the loss of the talents, knowledge and experience of so many highly skilled workers, for which no price tag exists.

The question of whether New York or the United States suffers a quarter or two of economic contraction wasn't foremost on economists' minds last week. They, like everyone else, were consumed with sadness, rage and other emotions swirling around last week's events.

"Remember: If it's a recession, it's only going to be a little recession," said Blinder at Princeton. "Nobody's going to get killed from it."

[Another candidate for the Irving Fisher award!]



-- Andre Weltman (aweltman@state.pa.us), September 17, 2001

Answers

The patriotic announcements by big institutions and instsitutional investors today, that they would not capitalize on the situation by selling short, had much to do with holding the Dow drop to only some 650 points. Without it, the damage would have been incalculable.

-- Big Cheese (bigcheese@multimax.net), September 17, 2001.

Looks like it is all downhill from here. Think of all the sour earnings reports and new warnings that will be coming up in the next few weeks. Ouch!

I must say, though, I was really impressed by the way the stock market held up today, from the technical side, I mean, their ability to handle a record volume day. I didn't really think it would happen.

-- RogerT (rogerT@c-zone.net), September 17, 2001.


Moderation questions? read the FAQ