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September 30, 2001

Many Once-Thriving Cities Are Suddenly Hurting By MARY WILLIAMS WALSH

Sept. 11, most people agree, changed everything — including, it now appears, the economic map of the United States. The suicide attacks of 19 terrorists are not only tipping the economy into a recession, they have also scrambled the business landscape in places thousands of miles from the destruction. Many cities and regions that, in America's gathering economic gloom, had strong growth prospects just three weeks ago no longer do.

"The parts of the country that were holding up well before the attack are going to be nailed by this," said Mark Zandi, chief economist at Economy.com, a forecasting concern in West Chester, Pa., that analyzed the attacks' implications for Money & Business. Yet the terrorists' punch was so strong that even places reliant on military contracting and telecommunications, which may benefit from the nation's new spending priorities, will be hurt, though to a lesser degree.

It is, of course, too soon to know the scale of the economic damage in any particular place with any precision. But it is no secret that, because the attackers used commercial jets as weapons, the most dramatic economic effects are already being felt in cities most heavily dependent on air travel and the lodging industry: tourist sites catering to fly-in visitors, major convention centers and cities whose airports serve as hubs for the big airlines. The damage is compounded in cities that also have important financial activity.

A few months ago, Las Vegas, Honolulu, Fort Worth, Miami and Orlando, Fla., were enjoying growth, for example. Now, many of their swimming pools shimmer silently and their cavernous convention halls stand empty.

"Recessions are similar in some ways, but they each have different triggers," said David Orr, chief economist at First Union in Charlotte, N.C. The last one, in the early 1990's, was started by a lending crunch in commercial real estate and struck Eastern cities with office towers, he recalled. The one before that, in the early 1980's, was set off by high interest rates and followed by a downturn, spurred by collapsing oil prices, that ravaged the oil patch.

This one, economists agree, has a spark no one could have guessed: fear of flying.

"Before the attack, you could draw a line down the map from Detroit to Birmingham, and for 500 miles on either side of that line, you were in a recession," Mr. Zandi said. "Now, the economic problems are going to broaden out and engulf the entire country."

In his analysis, Mr. Zandi ranked the nation's metropolitan economies, based on their vulnerability in the coming months. He also ranked the cities best positioned to withstand the shock of the attack. The rankings are to some degree based, he cautioned, on assumptions that may ultimately prove false: that there will be no more terrorist attacks in the United States, that the Federal Reserve will reduce interest rates by an additional half-point, that the government will continue to provide fiscal stimulus and that energy prices will remain relatively high.

Not a single city of the top 318 metropolitan areas in the ranking will benefit economically from the shock, he added. Every one will be hurt.

But the pain will probably be buffered in communities with colleges — students tend to stay in school during recessions — like Waco, Tex., State College, Pa., and Yolo County, Calif. Towns with humble tourist attractions that mainly draw visitors who arrive by car will also be helped, like Panama City, Fla., a beach town in the Panhandle whose relative obscurity may hold new appeal to jittery tourists. Cities with a military presence, like Fort Walton Beach, Fla., which has two Air Force bases, or information-technology businesses of interest to intelligence agencies, may also be cushioned. So will cities with oil activity, like Bakersfield, Calif., according to Mr. Zandi's thinking.

Jersey City, which ranks as the American city most resilient to the downturn, is a special case, Mr. Zandi said. It will reap large gains in economic output from the many displaced workers from Lower Manhattan who cross the Hudson River to work there.

Up and down the rankings, a general pattern emerges: America's larger cities, no matter how diverse their economies, are expected to witness the greatest economic disruption in the months to come. Towns and cities on the roads not taken — the places one enters and leaves on propeller planes — will endure much as before.

"Lubbock is at the ends of the earth," said Mr. Zandi, explaining why the remote Texas farm center landed seventh on his list of communities best positioned to weather the coming storm.

New York, perhaps oddly, does not make the top 10 distressed areas; that is because the rankings are based on projected economic activity in the coming months, not the economic value that was lost when the World Trade Center turned to dust. Not that New York won't suffer — it ranked 13th on the list of hardest-hit cities, close behind a Connecticut cluster that includes Stamford, Danbury and Bridgeport, and just ahead of Hartford and New London.

New Yorkers alone will file 75,000 unemployment claims as a result of the attacks on the World Trade Center, according to the Labor Department. But Mr. Zandi said their lost jobs were likely to be offset by jobs created by flows of federal and state money for rebuilding.

The more quickly and effectively President Bush's promised reprisals against the terrorist network restore public confidence, he added, the more quickly the rebuilding of Lower Manhattan will begin.

"If there's a quick resolution to the conflict, say, by the end of the year, then the New York City economy may come out of this better than many other parts of the country," Mr. Zandi said. "It will depend on how things unfold militarily."

Las Vegas, by contrast, relies heavily on air travel but has no rebuilding to do. Its economy appears to be the most harshly affected by the devastation 2,200 miles to the east. Before the terrorist attack, it had enjoyed the fastest economic growth of any American city — more than 5 percent.

The city's booming growth is driven, to a degree that only now seems alarming, by air tourism. On any given day, Las Vegas boasts a quarter of a million visitors, about a tenth of them conventioneers. In normal times, 46 percent of them come through the airport.

"One of every three jobs here is in travel and tourism," said Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas. Even as the city's economy has soared over the last decade, he said, the ratio has remained the same.

In recent days, the tourists who support those jobs have largely stopped coming. Some of those who were in Las Vegas left after the World Trade Center fell, saying they could not imagine rejoicing over a jackpot amid the national shock and grief. Business planners have called to cancel hundreds of conventions; as of last week, the Las Vegas Convention and Visitors Authority counted 249 such cancellations, a loss of 78,000 anticipated visitors who would have spent an estimated $78.7 million, not counting gambling. Even the city's quickie wedding business has tumbled, according to the Clark County Marriage License Bureau.

Immediately after the disaster, the large casino and resort concerns, like the Mandalay Resort Group (news/quote), Harrah's Entertainment (news/quote) and MGM Mirage (news/quote), tried to avoid laying people off by juggling part-timers' schedules and asking idle staff members to go home early. When that proved insufficient, they closed off whole floors and wings of their vast properties, and began layoffs.

Jim Gentleman, a vice president of Certified Airline Passenger Services, woke up one morning and found his business, which provided airline check-in services to tourists at their hotels, essentially banned by new federal security rules.

The company "has no cash flow at this point," he said.

Mr. Gentleman has laid off his entire field staff of 65 people and set about investigating a new business model: training his employees to operate the costly explosive-detection systems that have been considered for United States airports after previous air disasters, but rejected for cost and space reasons.

Mr. Gentleman now thinks that their arrival is inevitable — the only questions being who will run the machines and whether his lenders will tide his company over while he waits to find out.

"Can we reinvent ourselves?" he asked. "We are trying to be creative. But from a financial standpoint, we're in a very difficult position right now. We've been in touch with our banks and many of our suppliers and asked them to be patient, and fortunately, they are being understanding."

Las Vegas's newest megaresort, a hotel, shopping, gambling and convention complex called the Aladdin Resort and Casino, filed notice with the Securities and Exchange Commission that it might have to cease operations entirely. The Aladdin was already heavily burdened by construction debt before the crisis.

The troubles of Las Vegas will not be confined to Las Vegas. Nevada gets about three- fourths of its budget from tourism and gambling revenue, and already, the government in Carson City has frozen hiring and postponed several building projects. Henderson, population 150,000, has been warned that it may not get all the money it had counted on for a new state college that was to have opened next year. The Highway Patrol will have to make do with its outmoded headquarters a while longer.

Reno is also likely to suffer deeply — the nation's fifth-most-affected city, Mr. Zandi figures. There, casino owners are trying to avoid mass layoffs by cutting back staff hours.

Chuck Alvey, president of the Economic Development Authority of Western Nevada, put on a brave face and warned against drawing lessons about Reno from the Las Vegas outlook.

"Reno is very much a drive-in market," he said, noting that even amid the flood of the cancellations in Las Vegas, Reno held a motorcycle rally on the weekend of Sept. 22 that drew big crowds.

"People from the Bay Area can get here in a few hours' time by vehicle," Mr. Alvey said. "So we may be a little more insulated than Las Vegas."

Mr. Zandi thinks otherwise. Much of Reno's drive-in traffic comes from the San Francisco Bay Area, he said. And San Francisco is the seventh-most-affected city on his list, largely because of its ties to United Airlines, and its reliance on financial services and the weakened high-technology sector. He expects even drive-in tourism to Reno to taper off in the coming months, as Bay Area residents trim discretionary spending.

In Honolulu, civic leaders are not playing down the extent of their economic devastation. Honolulu ranks only fourth on Mr. Zandi's list of hard-hit cities, but that is because the list ranks degrees of change, not absolute misery. Yet while Las Vegas is falling back from powerful growth to a crawl, Honolulu had one of the slowest economic growth rates of any American city before the attack. Now it is being knocked flat.

No biker rallies, no special promotions will buck up Honolulu's economy until the day tourists are willing to fly out over long stretches of water again.

"This set of circumstances has really demonstrated our fragility and our vulnerability," said Gov. Benjamin J. Cayetano of Hawaii.

A recent tally by the University of Hawaii Economic Research Organization of air arrivals for the third week of September found domestic travel down 30 percent from the comparable period last year. International travel was down by 78 percent. During the gulf war, Honolulu suffered when its arrivals declined by just 13 percent. Now all bets are off; no one knows how long the shock will last.

"We are, quite simply, in uncharted territory," the university study concluded.

By the third week of September, Hawaii's Labor and Industrial Relations Department was receiving unemployment claims at more than twice the usual rate, the vast majority from people who had lost tourism income.

Jeremy Harris, Honolulu's mayor, hopes to prime the pump with construction. He has promised to spend more than $200 million on new building over the next four months. He is also lobbying the City Council to extend a seven-year property tax "holiday" on business construction and is considering giving Honolulu home- builders a tax holiday, too.

Governor Cayetano has called the Legislature back into session and is also floating relief packages, including $1 billion in new borrowing to build a prison, a medical school and a biotechnology research center. He, too, is talking about tax cuts, and he thinks the state may delay a scheduled increase in the minimum wage. He has suggested diverting money from Hawaii's hurricane relief fund to shore up an economy flattened by an attack half a world away.

Some business executives are using the down time to catch up on inventorying, repairs and maintenance. Others are preparing a new marketing campaign for the islands, featuring discount coupons and new cultural events. One idea is to promote the islands' "healing" qualities. The executives all want quick action, but they admit that they still do not know when it will be safe to begin the campaign.

In Fort Worth, which ranks third on Mr. Zandi's hardest-hit list, the economic downturn is no less powerful, but it takes a different form — and its experience is more typical of major American cities. Unlike Honolulu, Fort Worth can be reached by land. Unlike Las Vegas, it has spent the last decade consciously trying to diversify its economy. It was motivated by a round of mass layoffs when the cold war ended and the Navy canceled plans to build the A-12 fighter. Within six months, more than 7,000 General Dynamics employees there were out of work.

As it weaned its economy from military contracting, Fort Worth enjoyed one of the nation's highest job- creation rates in the 1990's. It built a big new freight airport, attracted a cast of big-name companies to an industrial zone that sprouted nearby, and revamped its downtown. It benefited mightily from the presence of the AMR Corporation (news/quote), the parent company of American Airlines, whose headquarters in the city make it the area's largest employer. American is also the largest tenant at Dallas/Fort Worth International Airport; it runs one of its largest maintenance hangars at the new freight airport.

So Fort Worth had a sense of déjà vu when on Sept. 19 AMR announced that it would lay off 20,000 of its 138,000 employees.

"All of those layoffs won't be here, of course," said Michael Ellis, an associate professor of economics and finance at Texas Wesleyan University. "But the dominoes are beginning to fall."

The Dallas/Fort Worth airport swiftly cut $10 million from its $200 million operating budget, and warned of more large cuts to come. Sabre Holdings, based in Fort Worth, announced that it would miss its earnings projections. Fort Worth hoteliers who cater to American pilot trainees said they feared for their survival. Restaurant owners worried that no one would want to eat out if America went to war. Home sales fell to 56 percent of the normal level, according to Edward L. Wilson Jr., a partner with the market research firm Residential Strategies.

Then came a blow from the financial-services sector: Ameritrade (news/quote) Holding, an online broker based in Omaha, announced that it was shuttering half of its 140,000-square-foot customer calling center at the Fort Worth freight airport.

Now, Fort Worth is pinning big hopes on military contracting again. It is lobbying hard on behalf of Lockheed Martin, which operates the former General Dynamics plant, and is competing with Boeing (news/quote) to build the Joint Strike Fighter, a successor to the F-16. The contract is expected to be awarded next month.

"We've all got our fingers crossed," said Bill Thornton, president of the Forth Worth Chamber of Commerce. The contract is the largest military procurement ever, worth as much as $200 billion over time.

Fort Worth's young people, meanwhile, seem to think business school is the best place to ride out the new tough times. Almost all of the area's business schools are reporting significant increases in enrollment this fall.

Mr. Zandi, the economist, said college enrollments were likely to be up all over the country in the coming semesters, particularly at state colleges and universities. Their relative low cost and proximity to home will hold special appeal in today's climate of insecurity and belt-tightening, he said. As enrollments rise, colleges are likely to hire more teachers, and students will spend their money in college towns, buffering those economies.

Thus State College, Pa., and Yolo County, Calif., home to the University of California at Davis, are on Mr. Zandi's list of least-affected localities. Albuquerque, whose economy is the largest of the "resilient" cities, is home not only to a large campus of the University of New Mexico but also to the Sandia National Laboratory and Kirtland Air Force Base.

In Albuquerque, business leaders perceive possibilities at Sandia, where the work includes weapons design and energy research. Sandia may one day contribute to the battle against international terrorism, said Webb Johnson, director of business research at the Greater Albuquerque Chamber of Commerce. Before the attack, Sandia had sponsored a business forum that gave rise to a number of spinoff companies, he said, like Micro Optical Devices, which makes tiny solar cells for satellites and was acquired by Emcore of Somerset, N.J.; and MesoSystems Technology, which sells devices that measure airborne contaminants.

Now, America's heightened sense of insecurity may give rise to even more commercial applications. Mr. Johnson spoke of Sandia's work in nanotechnology — the science of engineering complex machines the size of a pinprick — and the promise it holds for developing microscopic nerve-gas detection robots or spy satellites the size of grains of pollen.

But all that is in the future, Mr. Johnson added. In the here and now, Albuquerque's tourism sector is about to meet its first big test since the terrorists struck. This week, it is holding its hot-air balloon fiesta, normally the biggest tourist event of the year.

At first, when the Federal Aviation Administration banned all non-instrument-guided flying, city leaders were afraid that they would have to cancel the festival, which has been held for 30 years, Mr. Johnson said. But then the authorities declared that the balloons could ascend. Now the big question around town is how many balloonists will brave the trip to New Mexico.

Mr. Johnson spotted his first balloon of the season Wednesday morning, he said. He took it as a good sign.

"There seems to be a degree of confidence left," he said. "But it's fragile."

http://www.nytimes.com/2001/09/30/business/yourmoney/30POCK.html?ex=1002427200&en=f0c97c6342fa1a6b&ei=5040&partner=MOREOVER

-- Martin Thompson (mthom1927@aol.com), September 29, 2001