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Tough months ahead for economy -- then a roaring comeback?

Posted: Wednesday, September 19, 2001

WASHINGTON -- Car sales, home sales, tourism, business travel and other major parts of the economy suddenly look very vulnerable, and many economists no longer doubt that the country will suffer a recession this year.

''The horror of the events of last week literally stopped the economy in its tracks,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. ''There is no question that this terrorist event will kick us over into a recession.''

But Jones and other analysts who believe the terror attacks will trigger a full-blown recession also predict the economy will come roaring back next year, helped by the extra billions that will be spent on reconstruction and security.

Already, after only a week, losses to the nation's airlines have been put at $1 billion. The industry is seeking $24 billion from Congress to help it cope.

The disruption in travel has been felt at many tourist destinations, and the tourism industry is bracing for even bigger losses, especially at faraway destinations such as Hawaii.

Joel Prakken, chief economist at Macroeconomic Forecasters in St. Louis, said the hit to the economy in property damage and lost lives from last week's suicide hijackings will dwarf such recent natural disasters as Hurricane Andrew in 1992, which killed 61 people and resulted in $27 billion in property damage.

Analysts said losses among airlines and the insurance industry will be magnified throughout the economy as people cut back on spending, especially for big-ticket items such as homes and autos.

Consumer spending, which accounts for two-thirds of economic activity in the $10 trillion U.S. economy, has been all that kept the country out of a downturn for the past year.

Paul Taylor, chief economist for the National Automobile Dealers Association, said he was cutting his sales estimates for the rest of this year by 100,000 vehicles.

Even before the destruction at the World Trade Center and the Pentagon, consumers had grown more wary, reflecting a sharp jump in unemployment. The jobless rate surged in August to 4.9 percent.

Federal Reserve Chairman Alan Greenspan has warned since January that the biggest threat of an outright recession would come if consumers became so spooked about rising unemployment that they cut back on spending.

Now worries about job losses are being intensified by the terrorist attack and the resulting plunge in stock values, which translates into lower spending by people worried about shrinking investment portfolios.

Because of all these factors, many economists believe the current July-September quarter will see the gross domestic product drop as much as 1 percent. That would follow a tiny 0.2 percent rise in GDP in the April-June quarter.

A recession traditionally is defined as two consecutive negative quarters of GDP. Jones said he was looking for three quarters of negative GDP, including a decline of 1 percent in the current quarter, a drop of 5 percent in the October-December quarter and a loss of 2 percent in the first three months of next year.

That view is far more pessimistic than the Bush administration's, which insists the economy still stands a good chance of avoiding recession.

To make that happen, Bush met with his economic team again Tuesday to discuss what further support the government should provide on top of the initial $40 billion approved by Congress last week to help with reconstruction and bolster security.

''The president recognizes that this is not an era of normal economics, normal responses,'' presidential spokesman Ari Fleischer said. Officials said a variety of options including further tax cuts such as a reduction in the capital gains tax were being considered.

Whatever the government does now will come on top of $40 billion in tax rebate checks already delivered or in the pipeline and lower interest rates engineered by the Federal Reserve.

The Fed cut rates Monday for an eighth time this year. Many analysts predicted the federal funds rate, now at 3 percent, its low-point during the last recession in 1990-91, will fall further to 2 percent by the end of the year.

Because of the combination of lower interest rates, tax cuts and increased government spending for reconstruction and security, many economists believe a strong rebound is virtually guaranteed in 2002.

''This economy will be stimulated more in 2002 than anyone thought imaginable,'' said Diane Swonk, chief economist at Bank One in Chicago.

She forecast that GDP growth would jump to almost 4 percent next year because of the increased stimulus from government spending and further Fed rate cuts.

Jones agreed that growth should rebound at least by the second half of 2002, in part because the terrorist attack has forced Congress and the administration to abandon the debate over how big the government surplus should be.

''Washington in its petty bickering had been practicing Herbert Hoover economics by trying to maintain a large budget surplus in the face of the economic downturn,'' he said. ''Now all bets are off as to how big the budget stimulus package will be.''

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On the Net: Federal Reserve: http://www.federalreserve.gov

Treasury Department: http://www.ustreas.gov/

Office of Management and Budget: http://www.whitehouse.gov/omb/



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