Experts: Economy likely in recession

Experts: Economy likely in recession

Tucson, Arizona Saturday, 22 September 2001
http://www.azstarnet.com/star/today/10922Attacks-Recession.html

"People have a deer-in-the- headlights look right now. They are not traveling. They are not going out to eat. They are not going to shopping malls."
David Wyss
chief economist at Standard & Poor's
in New York

Question is: How long and how deep will it be?
THE ASSOCIATED PRESS

WASHINGTON - Massive airline layoffs. Empty hotels and restaurants. Wall Street's biggest weekly point decline ever. The economic damage from the terrorist attacks has virtually guaranteed a recession this year, many economists said Friday.

The only questions remaining: How long and how deep?

"I think we will have a mild recession that will end sometime in the first three months of next year, but we really don't know yet. Things are very uncertain and everybody is nervous," said David Wyss, chief economist at Standard & Poor's in New York.

Two closely watched forecasting groups - Blue Chip Economic Indicators and the National Association for Business Economics - surveyed economists in the wake of the Sept. 11 terrorist attacks. Both released surveys this week finding that an overwhelming majority of economists believe a recession is unavoidable.

The National Association for Business Economics survey, released Friday, found that 18 of its 21 forecasters believe the country is now in a recession.

Blue Chip Economic Indicators reported that the number of economists it surveyed who believe a recession has begun had jumped to 82 percent, up from 13 percent in early September.

In both surveys, the new pessimism was pegged to a belief that consumers - who account for two-thirds of economic activity - would cut back sharply on their spending in the wake of the terrorist attacks and rising layoff announcements.

Some analysts said the National Bureau of Economic Research, the official arbiter of recessions in the United States, will end up dating the start of this downturn in May or June, based on when various monthly statistics started to turn down.

"The Sept. 11 reign of terror didn't cause the recession, but it's finally allowed the financial markets to recognize one," said Jeffrey Rubin, chief economist at CIBC, a New York investment bank, who predicted the U.S. economy will see an additional 600,000 layoffs in coming months.

Wall Street closed out a horrendous week in which the Dow Jones industrial average lost 1,369.70 points, its biggest one-week point drop in history.

The loss amounted to 14.26 percent; that is the fifth-largest percentage decline and the biggest since May 1940, when the Dow traded at 122, less than the decline alone on Friday.

By the time trading ended Friday, $1.2 trillion had been sliced from the value of U.S. stocks.

Friday, the Dow fell 140.40, closing at 8,235.81, a loss of 1.7 percent. But the blue chips did recover some ground from an early 313-point drop.

The Nasdaq composite index fell 47.74, or 3.3 percent, to 1,423.19. For the week, the Nasdaq lost 272.19, or 16.05 percent.

"This is an extraordinarily emotion-filled stock market environment," said Hugh Johnson, chief investment officer at First Albany. "Investors are scrambling to defend their nest eggs."

Analysts said the plunge in stocks will further depress consumer spending as Americans watch their portfolios shrink.

Michael Evans, chief economist at American Economics Group, a private consulting firm, said he did not believe the economy will turn around until six months after the stock market finally starts to rebound.

"We have got to see corporate profits start to come back before we will get companies rehiring laid-off workers and increasing their capital investment," he said.

Evans said he was looking for a relatively mild recession with an unemployment rate topping out at 6 percent. The nation's last downturn in 1990-91 saw the unemployment rate climb to 7.8 percent. Unemployment rose to 4.9 percent in August.

In just the past 11 days, the airline industry has announced more than 100,000 layoffs and the disruption in air travel has quickly rippled through to hotels and other businesses that depend on tourism.

Northwest announced 10,000 job cuts Friday, or nearly a fifth of its work force.

"People have a deer-in-the- headlights look right now. They are not traveling. They are not going out to eat. They are not going to shopping malls," Wyss said.

Friday, Congress overwhelmingly passed a $15 billion relief package for the airline industry to help an industry among the hardest hit by last week's terrorist attacks.

The House voted 356 to 54 late Friday on the airline bill, which includes $5 billion in immediate aid and $10 billion in loan guarantees. The Senate vote was 96-1, with Sen. Peter Fitzgerald, R-Ill., casting the only dissenting vote.

The Conference Board released a new survey Friday that showed that 47 percent of consumers believe the country will sink into recession.

"While nearly 90 percent of consumers say they will not cut back on their buying plans, it's important to note that this figure is very likely to fall as widespread layoffs begin to materialize," said Conference Board economist Lynn Franco.

Mark Zandi, chief economist at Economy.com, estimated the losses to the economy in September alone from the attacks at more than $25 billion, led by $4.8 billion in losses at airlines and $4 billion at hotels.

The Blue Chip survey said that three-fourths of its economists forecasting a recession believe the downturn will be either milder or about the same as the 1990-91 downturn.

The Blue Chip consensus called for the GDP, which managed a tiny 0.2 percent gain in the April-June quarter, to shrink by 0.5 percent in the July-September quarter and decline by 0.7 percent in the final three months of this year before returning to positive territory early next year.

Many analysts believe growth next year will be helped by billions of dollars in extra government spending for reconstruction and to boost security but those increases won't be enough to prevent a downturn.

But all economists cautioned their forecasts will be highly dependent on such unknowable factors as how the U.S. military campaign against the terrorists proceeds.

"In the pessimistic alternative, the economic damage from the attacks mounts and . . . anxiety rises as the war on terrorism drags on with increasing casualties," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

However, he said under an optimistic scenario, the U.S. effort could meet with quick success by Thanksgiving and "with confidence soaring, the economy avoids a recession."

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