Strong, calm reaction by government urged to avert recession

Maintaining confidence of consumers vital, finance experts say

Terrorism Strikes America

Impact On Business

September 12, 2001|By William Patalon III | William Patalon III,SUN STAFF

With the U.S. economy already slumping, it will take a decisive and reassuring response by the Bush administration to yesterday's attack on New York and Washington to keep the country out of its first recession in a decade, experts on the economy said.

In recent months, with U.S. exports falling, manufacturing in the doldrums and stocks in a downdraft, only strong consumer spending has kept the weak American economy out of the abyss of recession. But with the financial fallout that's expected to emerge from the aircraft strike against the Pentagon and destruction of the World Trade Center's twin towers, experts say the government better do all it can to soothe consumer confidence.

"It's really on the shoulders of the government - they need to support the economic system," said David Citron, a managing director in the local office of Carret and Co. "That's the only thing that will keep the economy going. If they lose consumer confidence, look out below. ... If they do enough to maintain, then we'll probably be fine as far as the economy goes."

New York City is the world's financial center, and in many ways the trade center was a symbol of the importance of that part of the city. Because of that, the attack seems especially brazen and American investors and consumers will demand to know as soon as possible who planned the assaults - and whether more are possible.

The attacks "will keep the market in turmoil for a while until they find out who did it," said Gary T. Padussis, first vice president with Legg Mason Wood Walker Inc.

The first actions to help douse fears were taken soon after the morning attack. President Bush vowed that the country would "hunt down and punish those responsible for those cowardly acts." And the Federal Reserve said it was ready to pump extra money into the economy if needed, a move the central bank, led by Alan Greenspan, made right after the stock market crash in October 1987. Financial historians have long held that that move inspired confidence and helped avert a shock to the economy strong enough to prompt a recession.

Even so, the negative effects of yesterday's assault were seen immediately. The dollar dropped against other currencies as investors abandoned it in favor of gold and Swiss francs, assets that qualify as "safe haven" investments - a title the greenback usually holds.

Oil prices surged to their highest level since December on fears that a Middle East connection to the attacks could lead to U.S. shortages of oil. Stocks fell on overseas markets as panicky investors sold shares. U.S. stock markets were closed. And all air travel nationwide was canceled.

"It's really bringing business to a crawl," said Pradeep Ganguly, chief economist for the Maryland Department of Business and Economic Development. "The loss of work hours, the loss of business, the loss of deals made and stock transactions, and all the business meetings that were scheduled - that's all gone."

But the effect on the lumbering U.S. economy - which grew at an anemic 0.2 percent in the second quarter and 1.3 percent in the third quarter - could cut much deeper.

"We've been on the edge of recession for some time," said Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. "It seems like this will probably be enough to push us over the edge and into a full-blown recession. The impact on the capital markets, and on international trade, is probably going to be significant."

The biggest concern will be consumer confidence because consumer spending accounts for two-thirds of all economic activity in the United States. Continued spending by surprisingly determined consumers is all that has been propping up the American economy.

A continued increase in oil prices could put a real pinch on household budgets, taking a bite out of consumer spending, economists said. And any decline in stock prices would add to the damage wrought by the long slide in them by gnawing away more at consumer savings and retirement accounts.

Experts are predicting a fall in stock prices of at least 5 percent when markets reopen.

Consumers and stock prices have one major quality in common: Neither likes uncertainty. The longer it takes the Bush administration to find out who engineered the attack and make clear how it intends to retaliate, the more uncertainty will mount and the more damage the economy will incur, experts agree.

If the government succeeds, the attacks are "not something that will cripple the economy, and within [time] it will be business as usual," said Peter Morici, professor of international business at the University of Maryland and a senior fellow at the Economic Strategy Institute in Washington.

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