Weary patient needs tonic if it's to sit up and smile

Economy: Last week's tragedy has stoked fears of recession, and events of the next few weeks may determine if the economy can weather the challenges.

September 16, 2001|By Jay Hancock | Jay Hancock,SUN STAFF

Fueled for years by a potent blend of business investment and retail consumption, the U.S. economy was cut back to low-test this year as investment flagged and consumers alone pulled the cart.

Now the economy is running only on fumes.

Even consumer sales had been slowing before terrorists brought American commerce to a near-halt Tuesday by leveling New York's World Trade Center towers and attacking the Pentagon.

After last week, analysts fear that the economy will sink even further, putting it well into recession territory, as worry, uncertainty and business disruption add to the commercial burden of the nation and globe.

"It's fair to say that economies around the world were slowing faster than expected even before these events on Tuesday," said Alan Levenson, chief economist at T. Rowe Price Associates Inc. in Baltimore. In the wake of Tuesday's catastrophe, Levenson said, "Economic activity has been interrupted just the same way as if there had been an earthquake or a flood."

At least with a natural disaster, people usually know the worst will be over in a day or two. Now the possibility of new terror strikes, the prospect of forceful retaliation by Washington and general strategic instability promise to give the tenuousness a much longer half-life.

The next few weeks will be crucial, analysts said. In the economy's delicate state, early moves by consumers, businesses and financial markets could tip the scales one way or another in a manner that would prove self-reinforcing.

Falling retail activity and weak stock markets could further jar consumer confidence, which would have its own baleful effect on investors. On the other hand, stable stocks and steady store sales could establish a more positive long-term tone.

In any case, economists counseled keeping a close eye on consumer confidence, stock markets, interest rates, oil prices and a few other key gauges, such as the dollar, that should provide warnings of trouble ahead.

Consumer confidence and retail activity are crucial. Consumer sales account for some three-fourths of the U.S. economy.

"If we all hunker down and fall into this bunker mentality and stop going to the malls and going to the ballgames and going to restaurants, the economy will certainly slide into a prolonged recession," said Mark Zandi, chief economist for Economy.com in West Chester, Pa. "If, on the other hand, we remain calm and continue to do what we always do, there's a good chance we'll get through this without a full-blown, drawn-out recession."

Many analysts are comparing the present crisis to Iraq's invasion of Kuwait in 1990. In both cases, a late-summer shock jolted what was already a shaky economy.

During the Persian Gulf crisis, the initial blow of the invasion was followed by months of uncertainty as the first Bush administration initially shored up the defense of Saudi Arabia and then developed plans to repel Iraq's army from Kuwait. Similarly, the aftermath of last week's terror could include weeks or months of tense inaction while the United States and its allies plot tactics and strategy.

Stocks and consumer confidence both plunged in late 1990. The Dow fell by one-fifth between July and October of that year. Consumer spending fell by 0.7 percent in the third quarter and by 3.2 percent in the fourth quarter, according to Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown in New York.

The Persian Gulf situation helped spur the last U.S. recession, which began in July 1990 and ended in March of 1991. The recovery, not coincidentally, came right after the Western alliance drove Saddam Hussein's forces back into Iraq.

While jump-starting the economy shouldn't be the reason President Bush retaliates against terrorists, a hard, decisive U.S. blow against those responsible for last week's attacks could reassure consumers and businesses in the same way that Operation Desert Storm did in 1991, said Robert T. Sweet, chief economist for Allied Investment Advisors in Baltimore.

"You've got to get reasons or rationales for the consumer to spend, and he or she is going to be reluctant to spend after Sept. 11's event," Sweet said. "If we retaliate and take action, the consumer will know we are doing something about this."

Consumer confidence had already fallen steeply before Tuesday's attack. The jump in unemployment to 4.9 percent reported on Sept. 7 helped depress sentiment in a University of Michigan consumer survey taken immediately afterward.

Besides the monthly confidence reports, retail sales, home sales and mortgage applications will also serve as important early indicators to buyer sentiment, Zandi said.

Interest rates will be an important symbol to consumers as well as a possible driver of spending. Economists expect the Federal Reserve soon to cut short-term rates by a quarter or half a percentage point and eventually to reduce rates by up to three-fourths of a full percentage point from present levels.

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