History - and Greenspan - point to economic revival
Federal Reserve chief sees resiliency in economy, but also uncertainty, after last week's terrorist attacks.
Last week's disaster probably pushed the United States economy into recession. But judging by history, a recovery could come faster than many Americans may now expect.
The vast economy has sturdiness - and a responsiveness to the fuel of low interest rates, tax cuts, and new spending - that bode well for the future. One new study of disasters, from the Kennedy assassination to Hurricane Andrew, found a short-lived impact on the broad economy - often just a few months.
The great uncertainty is that last week's attacks represent a different type of disaster from other recent events. The effect, psychologically at least, is not isolated to a single city or region. From travel agencies to auto showrooms, sellers of big-ticket items worry that consumer confidence has been shaken - and could be further rattled if a crackdown on terrorists prompts reprisals.
Federal Reserve Chairman Alan Greenspan highlighted these divergent economic forces in Washington yesterday.
"The American economy has become increasingly resilient to shocks," he told the Senate Banking Committee. He said the economy's long-run prospects "have not been significantly diminished by these terrible events."
But he added sobering notes. "In contrast to natural disasters, last week's events are of far greater concern because they strike at the roots of our free society, one aspect of which is our market-driven economy."
At the moment, while stock prices have plunged and air traffic has been curtailed, experts see signs that shoppers are returning to at least their basic spending routines after a week of near-standstill.
Over the longer run, devastating events can change the pattern of economic activity in important ways. The 1973-74 hike in oil prices altered business and consumer practices. Today, extra security measures in the nation could hurt corporate profits and boost federal spending.
Already, alternative means of transportation - railways and buses, for instance - have been booming. Teleconferencing has become more popular.
In his testimony, Greenspan speculated there could be an upwelling of support for expanded free trade - a side-effect of newfound global unity against terrorists.
While there is no easy comparison to the tragedy at the World Trade Center and the Pentagon, a new business-backed study offers some useful insights.
Looking at 14 serious events, ranging from the assassinations of President Kennedy and Martin Luther King to the previous bombing of the World Trade Center, it found that the economic effects often lasted just two or three months.
"Then there is a rebound," says business-cycle expert Victor Zarnowitz , the economist who did the study for the New York-based Conference Board.
Major natural disasters - such as Hurricane Andrew in 1992 or the Northridge, Calif. earthquake of 1994 - barely show up in the national statistics on output or unemployment for the year.
The current scenario is more severe, in both loss of life and economic impacts such as the temporary airport shutdown.
While this may deepen a recession, government stimulus is paving the way for a rebound.
"Recovery will be a bit stronger than it was going to be," says Paul Kasriel of the Northern Trust Co. in Chicago. "But it will start from a lower base."
He and some other economists now expect a snapback to to begin early in 2002 - rather than later this year.
Harvard economist Jeffrey Frankel doesn't foresee a "serious" recession. As a member of President Clinton's Council of Economic Advisers, he examined in 1998 the risks to the economy from the computer glitch dubbed the "Y2K bug."
His study reviewed 20 major disasters in the US between 1971 and 1995. They included riots in Miami in 1980, the Mount St. Helens eruption in the same year, and a 1993 winter storm affecting 24 Eastern states.
Diversion of resources to replace buildings, for example, had only "a limited impact on current sales and production," he found.
"The American economy is large, diverse, and resilient, and people will find ways around those disruptions...." Frankel noted in an annual report of Mr. Clinton's economic advisers.
The closest match to the current disaster may be the 1990 Gulf War after Iraq invaded Kuwait. A recession had started a month before the US and its allies entered the conflict. The war likely worsened the slump, which lasted to March 1991.
This year, according to official statistics, the economy was growing at a 0.2 percent annual rate in the second quarter - barely positive. Statistical revisions later could easily turn that into a slightly negative number, notes Zarnowitz.
With the impact of the twin towers disaster, the economy could shrink by 0.2 percent in the current quarter and 1.8 percent next quarter, predicts Cynthia Latta of DRI-WEFA, an economic consulting firm in Lexington, Mass.
As in 1990, the US economy today has been struggling. Further, key economies abroad in Europe, Japan, and southeast Asia have slowed.
Nor is it known what the US "war" against terrorism means in real terms. Economists don't know the extent of future US operations. "This is a process, not a single event," Zarnowitz says.
Nonetheless, at this time, economists are counting on the monetary ease of the Federal Reserve and extra spending or tax cuts by Washington to help lift the economy out of its doldrums.
"The fiscal landscape has changed," says Jeff Rubin, chief economist of CIBC World Markets in Toronto.
Congress has already allocated $40 billion to alleviate the damage done in New York. Defense spending will be raised. The airlines may get a rescue package.
More tax cuts seem likely. Cuts under discussion include a lower capital-gains tax rate, investment tax credits, and a tax rebate to those whose incomes were so low they didn't benefit from this summer's tax rebates.
"All the stops are out," says Mr. Kasriel of Northern Trust.
He expects short-term interest rates to be trimmed another 0.75 percentage points this year.
The lockbox that was intended to protect the surplus in Social Security revenues has been opened. "The days of budget surplus are behind us," says Mr. Rubin of CIBC.
The nation's money supply, the fuel for economic activity, has been growing at a rapid 9 percent rate in the past year, by one common measurement.
"We are pouring in a lot of money," says Kasriel, somewhat fearful that the nation faces more inflation in the future.
"A big unknown is how quickly people come out of their cocoon and start spending," he adds. Another incident of sabotage, for example, could keep consumers away from public places for an extended period.