The terrorist attack on the US may mean the economy will shrink in the third quarter for the first time in more than eight years, elevating the possibility of the first recession in a decade.
Disruptions to business and the shaken confidence of consumers because of yesterday's attack "spells a lot of trouble for the US economy," said David Littman, senior economist at Comerica Bank, in Detroit. The current quarter "will probably show no growth to a contraction."
That may lead the Federal Reserve and other central banks to reduce interest rates to bolster confidence. The economy expanded at a 0.2 percent annual rate from April through June, the weakest quarter in eight years. With consumer spending accounting for two-thirds of gross domestic product, a sustained interruption of business may prevent a rebound, analysts said.
Walt Disney Co, which closed its theme parks, pledged to reopen them today. Airlines were shut down at least until midday, after all flights were grounded yesterday.
"The American economy will be open for business," President George W. Bush said in a nationally televised address.
That wasn't the case yesterday. Retail outlets from Starbucks Corp to Gap Inc closed across the country. Mall of America in Bloomington, Minnesota, shut the doors to its more than 500 stores and 12,000 workers.
"We have closed stores through-out the country, as appropriate, in major markets such as New York, Boston, Chicago and San Francisco," said Margery Myers, spokeswoman for Talbots Inc., a Hingham, Massachusetts-based retailer of clothing for women and children. The company has 768 stores.
Even Major League Baseball canceled its games last night.
Stocks will probably decline once trading in the US resumes.
In Asia and Europe, shares slumped following the attack. Japan's Nikkei 225 stock average fell below 10,000 for the first time since Aug. 1, 1984. The UK's FTSE 100 Index plummeted 5.7 percent and France's CAC 40 lost 7.4 percent, the biggest declines since the market crash of October 1987.
"Whenever you've had these things before, you've had big drops" in stocks, said Roger Kubarych, chief US economist for HVP Group in New York. "This will put a lot of pressure on the Fed to lower rates."
The last time the US economy contracted was in the first quarter of 1993, when GDP shrank by 0.1 percent. "The chances of a real recession are many times higher than they were" before the attack, Kubarych said. "I would say that the probability is 50-50."
The economy has already had its weakest 12 months of growth since the 1990-1991 recession. Fed policy makers have reduced interest rates seven times this year to prevent the slowdown from becoming worse.
Economists cautioned that even a couple days of disruption could lead to a contraction. "At least for a couple of more days a substantial amount of economic activity will remain paralyzed," said Thomas Carpenter, chief economist at ASB Capital Management. "It's clear that when you send everybody in the country home and you freeze all the airplanes, airlines will remain grounded for days, that will interrupt normal work activity."
A bigger risk is that consumer confidence will plunge. A measure of consumer confidence from the Conference Board fell to its lowest level in more than eight years after the start of the Persian Gulf War in January 1991. Confidence is regarded as an indicator of spending. Personal spending during that same month fell 0.4 percent.
Before yesterday, central bankers were saying the economy's weakness would persist for a while. "The common view is the revival will be a little later and somewhat slower than people thought three or four months ago," William Poole, president of the Fed Bank of St. Louis, said yesterday in New York.
Economists have been forecasting an eventual rebound. The Blue Chip Economic Indicators consensus forecast released in August showed the economy would probably expand at a 1.7 percent rate in the current third quarter and a 2.8 percent pace in the final three months of the year.
Following the Oct. 19, 1987, stock market crash, the Fed provided cash to banks and securities firms to keep financial markets functioning. "The Fed is the lender of last resort," Fed Governor Edward Gramlich said on Tuesday in Tucson after the attacks. "If credit is needed to make transactions go, the Fed will provide it."
Gramlich said he was making that statement "in the spirit" of a similar statement from Fed Chairman Alan Greenspan in 1987.
That suggests the possibility of a rate cut before the Fed's next meeting Oct. 2, analysts said. The Fed already reduced rates twice this year in surprise moves between scheduled meetings of the policy-setting Open Market Committee.
"Given the events, it would appear that a Fed cut in the very near-term looks more likely," said Marc Chandler, chief currency strategist at HSBC Securities in New York. "The immediate economic implications aren't good."
Over the longer term, the economy may benefit from rebuilding efforts and as consumers slowly regain confidence.
While there may be adverse effects from today's attacks, "what the government does may go in the other direction," said Robert Mundell, professor of economics at Columbia University and 1999 winner of the Nobel Memorial Prize in Economic Science.
"You're going to have a new building, and there may be a step up in military" spending, Mundell said.
Government statistics show that spending rose 0.6 percent in February 1991 and 1.1 percent in the following month after the US and its allies brought a quick end to the Gulf War. The Conference Board's consumer confidence index, which fell to 55.1 in January 1991, surged two months later to 81.1.
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