On the street where we live
All eyes are on the financial markets as the nation digs out and dusts itself off
Samuel Hamilton was thinking about building a deck and small pond in his backyard last Tuesday when he heard about the terrorist attacks in New York and Washington. All of a sudden, the 48-year-old Temple Terrace, Fla., resident said, he "just didn't want to talk about it anymore."
But as the nation struggles to return to normalcy, Hamilton says he is ready to move forward with his $7,000 project. Who knows, he may even buy a few blue-chip stocks when U.S. financial markets reopen. "It wasn't the bricks and mortar that they were aiming at," says the retired telecommunications engineer. "It was our spirit. I hope people get back to business."
The global economy, which was already on the brink of recession, prays that others share his sentiment. A Harris Interactive poll conducted after the Tuesday attacks found that only a minority of consumers, about 23 percent, planned to spend less money as a result of the terrorist acts. Only 1 percent of investors said they would sell stocks, emboldening Wall Street as it braces for what could be a volatile opening after having been closed for four straight trading days.
Given this unusually sustained cooling-off period--the longest unplanned trading hiatus since the Depression--the Street is holding out hope that the markets won't sell off dramatically this week as they have immediately following previous disasters. Overseas markets were mixed last week but not panicky. Major securities firms and companies have agreed to step in and prop up the market should stocks falter sharply.
But whether consumers back up their words with action depends crucially on two things: the price of oil and what happens next in the escalating war against terrorism. To most economists and financial experts, the immediate outlook is somber. "I'm afraid it's not going to be good," says Princeton economist Alan Blinder. "The hope is that it's not terribly bad."
Catastrophes of recent decades, if any guide, have had longer-term consequences for the U.S. economy only when they produced an oil price spike, as in the buildup to the 1991 Gulf War and the 1980 Iran hostage crisis, or fed into an already shaky economy. The second condition has clearly been met. A survey taken on the eve of the attacks showed consumer confidence sliding in the wake of dreary unemployment reports. Many shoppers already agreed with Lauren Ohlgren of Portland, Ore., that "the recession has been going on for a while and I've already been hit very hard." Ohlgren, shopping at a downtown mall on Thursday, apologized for her outing. "It's really the first time we've left the TV to do normal things."
Silver lining. The "CNN effect" that keeps families glued to their sets is the bane of U.S. retailers--and world markets. On the oil front, however, things are less threatening for the moment, though that could change rapidly if the Mideast is affected by U.S. retaliatory measures. The attacks provide "no reason for prices to change--except maybe on the downside," says oil expert Philip Verleger. "Cutbacks in U.S. aviation alone could save 300,000 barrels of oil a day."
And, Blinder notes, "the perverse bright side of disasters is a lot of building activity." Most of that will be concentrated in lower Manhattan, where reconstruction estimates run as high as $30 billion. "This is the world financial center and this will remain the world financial center," says Marc Goloven, senior regional economist with J. P. Morgan Chase. Most financial firms learned from the 1993 bombing to decentralize operations, and the Y2K computer bug crisis also prompted many to set up remote operations and contingency plans. The city's verve will spark a fast recovery, Goloven predicts. "There will be thousands of construction jobs and workers descending on the area."
More general, though gradual, stimulus will come from massive infusions of government money. Congress hurriedly prepared a $40 billion emergency spending bill as a start; the Federal Reserve, European, and Japanese central banks flooded markets with liquidity; analysts expect accelerated Fed interest rate cuts.
But immediate losses are staggering. Grounding all air traffic last week cost carriers some $2 billion, bringing to nearly $5 billion the industry's projected losses for the year. For the cargo carriers, losing even one day's business "obviously has a pretty horrendous impact," says Larry Coyne, CEO of Coyne Airways. "Your costs keep on mounting, because you pay for your aircraft even when they're not flying."
The insurance industry faces potential claims of $20 billion or more, topping the previous high of $15 billion from Hurricane Andrew in 1992. But the industry has $300 billion in capital. "We are well diversified," said American International Group Chairman M. R. Greenberg.
Chain reaction. Adding to the worries: Large companies, which were cutting back business travel before last week's hijackings, now have another reason to slash spending. "When you cut air travel, you're also cutting hotel stays, car rentals, and dinners out at restaurants," notes Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. Transportation disruptions also halted production at firms such as General Motors and Ford that depend on just-in-time deliveries of supplies and parts. "For any company teetering on financial ruin, this accelerates the process," adds Scott Cleland, CEO of Precursor Group. Midway Airlines, for example, ceased operations last week.
Ironically, the terrorist attack may have the opposite effect on investors. At its core, investing is about two things: fear and hope. Until last week, investors' biggest fear was a recession. Now Wall Street just assumes a recession, and "that takes away one uncertainty," says Thomas McDowell, money manager with Rice Hall James. "Now, we can start to look across the valley for signs of hope."
With Matthew Benjamin, Joellen Perry, Katherine Hobson, Noam Neusner, Kit Roane and Leonard Wiener
This story appears in the September 24, 2001 print edition of U.S. News & World Report.