- The Washington Times - Tuesday, October 30, 2001

Stocks tumbled yesterday on worries about a prolonged war in Afghanistan and a shrinking U.S. economy, with the Dow Jones Industrial Average losing 276 points.
The market’s biggest setback since the Sept. 11 terrorist attacks came after Defense Secretary Donald H. Rumsfeld predicted a “very long” military campaign against the Taliban and terrorist network in Afghanistan, disappointing investors who had hoped for a quick resolution of that conflict. The war is entering its fourth week.
Stocks and the dollar also were roiled by predictions that a report on Wednesday will show U.S. economic output plunged by between 1 percent and 2 percent this summer in what would be the beginning of a recession. The dollar took its biggest fall against the euro since the attacks.
“People are starting to come to the realization that the economy is not recovering as quickly as they had hoped,” said Steve Massocca, head of trading with Pacific Growth Equities.
The Dow dropped 3 percent to 9,270 while the Nasdaq Composite Index lost 69 points, or 4 percent, to close at 1,700. The Dow after a month of rallying has failed to regain levels established before the attacks, but the technology index remained above preattack levels even with yesterday’s decline.
Leading the indexes down were Boeing, which lost a $200 billion defense contract to Bethesda-based Lockheed Martin on Friday, General Motors, Enron, Microsoft and Intel. Stocks continue to be hit by news of poor earnings and little improvement in the business outlook, despite dramatically reduced expectations among investors.
“Without a doubt, there will be a contraction in the third quarter,” said Michael Swanson, economist with Wells Fargo, who predicts a 0.9 percent decline in gross domestic product in a report from the Commerce Department Wednesday.
That will confirm the economy is in recession, he said, but he predicted it would be a mild downturn like the one in 1990-91 thanks to the Federal Reserve’s aggressive interest-rate cuts and dramatically higher spending and tax cuts from Congress this year.
Business profits will be cushioned by the tax and rate cuts, he said, while consumers will be better off than in previous recessions because unemployment is starting out relatively low at 4.9 percent.
A report on Friday is expected to show unemployment rising to about 5.2 percent in the wake of the terrorist attacks. But that is a full percentage point lower than where it was at the beginning of the last recession, he said.
Many economists expect the unemployment rate to rise to 6 percent or 7 percent before the recession is over.
Ed Yardeni, chief investment strategist with Deutsche Banc Alex.Brown, said businesses already are swimming in excess capacity approaching 25 percent after a year of declining demand. In past recessions, that led to big layoffs and an unemployment rate of around 9 percent, he said, but he does not expect such massive job losses this time around.
“Many employers that overhired may be resisting cutting their bloated work forces because they remember how hard it was to find staff only a year or two ago,” he said. “But if the job market deteriorates significantly in coming months, that could make the recession deeper and longer than widely expected.”
The market’s rally earlier this month suggests that most investors are expecting the economy to start emerging from recession early next year, in what would be a relatively mild, V-shaped downturn characterized by a quick recovery, he said.
For such a V to occur, Mr. Yardeni said, employers must continue to refrain from laying off workers in what would be an “unprecedented, surprising and bullish” development. But if expectations prove too optimistic, he said, stocks have further down to go.

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