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Fri, Sep 14, 2001 - Page 19 News List

Business Focus: Sophisticated attack caught US in vulnerable position

By Caroline Baum  /  BLOOMBERG , NEW YORK

After the shock and horror, disbelief and anger subside; after the death and destruction are assessed and assimilated; and once US financial markets reopen for business presumably today, the US will get back to the business of the US,which, after all, is business.

The twin towers are no more, victims of a well-coordinated terrorist attack utilizing hijacked planes as missiles. No one who witnessed the crumbling of the two tallest buildings in New York City, which towered over the financial district as a symbol of everything that was possible in the US, will ever be the same.

Still, to change our way of life, to cower in response to terrorism, would give undeserved power to those who inflicted the damage. Life will go on, even as loss lingers.

The sophisticated, precisely orchestrated attack, with four fuel-laden jetliners taking off from East Coast airports for transcontinental flights, hit with the US economy already in a vulnerable position. The economy expanded at an anemic 0.2 percent annualized pace in the second quarter. Following Friday's reported spike in the unemployment rate to 4.9 percent in August from 4.6 percent the month before, economists marked down their outlook for economic growth, their target for the federal funds rate and the odds a recession could be avoided.

With the latest attack at the heart and pulse of New York's financial district, the fear is that the consumer, who has been holding the economy together with stickpins, will retrench. In other words, adios to slow growth, hello recession.

The financial futures market voted sharply and swiftly, expressing its view that the aftershock would force the Federal Reserve's hand quickly. In Asian trading last night, the implied yield on his and next year's eurodollar futures contracts, traded on the Simex, plummeted 23 to 42 basis points. The December 2001 contract closed at 2.9 percent, implying a funds rate of about 2.75 percent by year-end.

In deference to the tragedy, most economic research departments refrained from instant analysis on Tuesday. By yesterday, first thoughts were starting to trickle out.

Most of the focus was on the demand side, as it is with all supply shocks. Wall Street, well-trained in demand-side Keynesian economics, pretty much ignores the supply side, except when it's not applicable. (When OPEC increased oil production by 3 million barrels a day as crude oil soared to US$$37 a barrel last year, this was deemed a "supply shock" even though increased demand pushed prices higher.) The loss of productive capacity as a result of the attack will be less than if the facilities involved produced capital equipment. The nature of Wall Street's business is financial services, which can be provided from alternate locations or electronically. The ability to produce will be more seriously impaired by the loss of human capital than physical capital.

Like all supply shocks, this one will raise prices: specifically, the cost of doing business.

"You thought it took a long time to board an airplane before this happened?" asks Paul Kasriel, director of economic research at Northern Trust Corp in Chicago.

Businesses have already stepped up security. Airports and airlines are going to have to examine what happened to their security systems and do something to improve them.

The virtual shutdown of business in New York City, as well as across the country, disrupted deliveries. With planes grounded, air-cargo companies had to resort to less-efficient means to get the goods to where they were going.

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