Mon, Oct 08, 2001 page19

• US economy shows signs of recovery

  The shock of the Sept. 11 attacks was devastating. Now, the question is whether it will be optimism or pessimism that wins in what happens next

  • NY TIMES NEWS SERVICE
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  The hijackers brought down the World Trade Center and traumatized a nation. But it is not as clear that the economic damage they wrought will be long lasting.

  The immediate economic impact was devastating. Consumers seemed to go on strike. Retail sales plunged; so did auto sales. The airlines were shut down for days, then opened with so little business that Congress quickly approved a bailout.

  But the picture has brightened a bit. The industries most sensitive to lower interest rates -- cars and housing -- have bounced back more than people expected.

  

  The picture in the US has brightened a bit. Cars and housing have bounced back more than people expected. While airlines are suffering, construction has been holding up. Above is a new terminal being built at Bradley International Airport, Windsor Locks, Connecticut.

  PHOTO: NY TIMES

  "There was an initial shock impact," said Henry Kaufman, the economist and money manager. "The shock impact is moderating, but how much is not clear."

  Nearly all economists think the economy is contracting now, and most think the contraction will last long enough to go down in the books as the first recession since 1990-1991, thus ending the longest period of expansion in US history.

  Retailers' statistics show business is up from the immediate aftermath, when Americans were glued to television sets, but is still below normal. At Home Depot, said Robert L. Nardelli, the president and chief executive, sales began to pick up the weekend after the attack. "Based on a depressed economy, we're back to normal," he said.

  In other times, a depressed economy would deeply alarm investors. But the stock market rebounded enough to erase most of the plunge that occurred in the week after trading resumed on Sept. 17. That reaction may, however, only show that everything is relative: Parents might view a report card filled with Cs and Ds as good news if they had expected the child to flunk out of school.

  It is not the same as making the dean's list, of course, and the continuing surge of layoff announcements makes it clear that many companies are deeply worried about their businesses. Indicators like weekly steel production, which reflect the pace of the industrial economy, show no signs of improvement.

  The tourism industry suffered immediately. Just before the attack, the number of passengers carried by 11 top airlines was running about 1.2 percent above levels a year earlier, said David Swierenga, chief economist of the Air Transport Association, a trade group.

  For a few days after planes resumed flying, the volume of passengers was down more than 50 percent from the levels of last fall, but that has improved until the comparable figure was off just 29 percent on Thursday, the latest data available.

  That decline is not being caused just by skittish consumers worried about terrorism. Businesses, responding to the slow economy, were cutting back before the attack, and have cut back more since.

  In the spring, the Cintas Corp, a Cincinnati-based maker of corporate uniforms, told its executives to drive rather than fly if the trip was fewer than 200 miles. After the attack, said Robert Kohlhepp, the chief executive, that limit was raised to 300 miles.

  For the airlines, a 30 percent fall in traffic would be bad enough; the revenue implications are worse. Fares were already lower than in the previous year, and now carriers are cutting them aggressively.

  Even before Sept. 11, the US economy was probably in recession. The September employment report, released on Friday, showed a loss of 199,000 jobs during the month, the largest decline in more than a decade. Almost none of that reflects activity after the attack, and there has been a surge of layoff announcements since then.

  "We now have a more dramatic pace of firing, and that is what is going to weigh on consumer spending," said Robert Barbera, the chief economist of Hoenig & Co. "It is not a loss of nerve. It is lost paychecks."

  No easy way out

  Even Warren Buffett, the chairman of Berkshire Hathaway and a man not usually given to fear-mongering, sees no easy way out of the current economic problems. "I'm sure we are in a recession, probably a relatively deep and extended one," he said.

  This recession was shaping up as a very unusual one in any case. In the usual US recession, rising interest rates brought on as the Federal Reserve tightens monetary policy cause consumers to cut back spending, and the housing and auto industries are the most drastically affected. Only after that impact is felt does industrial production begin to slide.

  But this downturn was looking like a backward one even before the attack. September will go down as the 12th consecutive month of declining industrial production, tying a record set just after World War II, when the economy was winding down from war production.

  The slowdown had been preceded by an incredible boom in corporate investment, largely in the technology and telecommunications industries. That boom had both contributed to -- and been enhanced by -- the stock market bubble, which sent stocks of such companies to dizzying heights and gave them all the money they could use for investment. But the bubble burst in spring last year, leading to the slowdown in investment.

  Some economists had thought they saw signs that the industrial part of the economy was no longer getting worse. "In the non-tech sector, there were signs of a bottom," said Ian Shepardson, chief US economist for High Frequency Economics, a research firm.

  Postwar recessions have lasted six to 16 months. They usually end after substantial Fed interest rate cuts, which make cars and houses more affordable and unleash pent-up demand, creating a surge of growth.

  This recession, however, has yet to see the housing market plunge, and nonresidential construction had held up surprisingly well until it began to soften this summer. The automobile industry has been hurt, but it has done far better than its executives expected. The US Federal Reserve's aggressive easing has helped those industries, though it has also made it less likely that they will be able to lead the economy out of the recession, simply because there is less scope for rapid growth in demand. And no one thinks that the pace of investment spending in technology will soon recover to its previous pace.

  Just what the engine of growth will be is not clear. The longest postwar recession, which lasted 16 months, occurred from from 1973 to 1975. That was also the last time the major world economies -- those of the US, Western Europe and Japan -- were in recession at the same time, as they may soon be if the current slowdown in Europe continues to worsen.

  Then, the first oil shock had devastated all developed economies. Now the reasons are more varied, but the result could be the same. With no major economy in a position to lead, it could take a while for the economic stimulus efforts to have an impact.

  The bear market that accompanied the 1973 to 1975 downturn was the worst since the Great Depression, with the Standard & Poor's 500-stock index falling 48.2 percent before it bottomed out in October 1974, five months before the recession ended. At its closing low on Sept. 21, the S&P 500 had declined 36.8 percent, making it the second-biggest drop since the Depression.

  Difficult choices

  For investors who grew accustomed to big profits during the 1990s, the current investment scene presents difficult choices. An investor who wants absolute safety must settle for returns of less than 3 percent on short-term government securities. But buying stocks seems like a greater risk than it used to be.

  Mutual fund investors moved out of stock funds during the first two weeks after the attack, but came back in the week ended Wednesday. Clearly, many hope that the recession will be a short one, and that last month's lows will not be breached.

  Those who are betting on a mild recession are hoping that the Fed's continued easing of credit and a stimulative fiscal policy will get the economy moving. Washington politicians -- who were trapped in a debate about Social Security lockboxes before the attack -- now are arguing about the best way to put together a stimulus package. Since tax cuts may be saved by the recipient, public spending probably has more recession-fighting firepower.

  Perhaps the largest uncertainty is how the US will respond to the continuing bad news on the economic front -- not to mention to the possibility of further terrorist attacks or to military actions by the US. Those who are most pessimistic about the next six months assume that consumers will cut back and increase savings, worried that the next round of layoffs might touch them personally.

  Every post-World War II recession, except for the most recent one, from 1990 to 1991, had at least one quarter in which the economy fell by at least 4 percent. The current quarter is the one most likely to be that bad, particularly if the effects of the attack linger. Such a fall might leave the economy ready to rebound, but it might also alarm consumers and delay a recovery.

  But perhaps that will not be the case. For the last decade, it has been the optimists who turned out to be right. Already, applications for mortgages to buy homes have rebounded to nearly their pre-Sept. 11 level, even as unemployment rolls have hit levels not seen since 1991.

  That deep optimism in the US helped keep the economy growing even as industrial production plunged over the last year, and may have contributed to the rebound in sales seen in the last couple of weeks. It won't keep corporate profits in many industries from being devastated, and it won't keep overextended companies from being forced into bankruptcy. But it might make this recession milder and shorter than it otherwise would have been.
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