- The Washington Times - Tuesday, September 10, 2002

"Global recession near," blared the headline of a major daily newspaper in the days after the September 11 terrorist attacks. "A body blow to the economy," declared another.
The headlines reflected the conviction of the American public as well as economic gurus that Osama bin Laden had done the unthinkable: plunged the mighty U.S. economy, with its financial center in New York, into the depths of a recession.
Without a doubt, the bloodletting spawned by the attacks thousands of layoffs by airlines and hotels and the shutdown of economic activity in parts of lower Manhattan dealt both real and psychological blows to Americans and the economy. Fears of flying or going to public places lingered for months, adding to an atmosphere of crisis that hung over the economy.
But the economy, in gradual decline for most of the year, staged what was widely believed to be an initial recovery in the months immediately after the worst terrorism assault in U.S. history.
Certain industries particularly air travel, insurance, tourism and hospitality continue to suffer. But in some ways, America's reaction to the attacks keeping a stiff upper lip, going after the perpetrators, increasing security and showering aid and compensation on the victims turned out to be the medicine the economy needed.
"The attacks were a failure in many ways. They accomplished nothing to erode the strength of the American spirit or the resiliency of our financial markets" and economy, said Vickie A. Tillman, executive vice president at Standard & Poor's Corp.
Economy snaps back
The Wall Street credit agency conducted a comprehensive review of the economy in the year since the attacks and found that the economic devastation was mostly short-lived and focused on travel-related sectors. Certain industries actually prospered in the aftermath.
Defense and security companies saw their fortunes rise. But the biggest winners were the housing and auto industries, where sales soared to record levels as Americans increased their nesting habits and took to the roads instead of traveling by air.
The rush to buy homes and cars which still continues, often to the detriment of other retail sectors was aided by the Federal Reserve's moves in the fall to slash interest rates to their lowest levels in a generation to cushion the economic impact of the attacks.
The dramatic drop in interest rates also spawned an unprecedented refinancing wave, easing financial burdens for consumers and businesses and infusing hundreds of billions of dollars into the economy.
The economy was bolstered as Congress and the White House stopped quarreling over the budget and quickly passed $150 billion in spending increases for defense and homeland security and tax cuts for ailing businesses, with aid for New York, airlines and others suffering from the attacks.
Major indexes dropped to three-year lows Sept. 21, in the first week of trading after the attacks, but the financial system made an impressive comeback. Wall Street was up and running in days despite major losses of both people and facilities in lower Manhattan. By the beginning of this year, the major stock indexes had recouped most of their terror-induced losses.
Malaise sets in
A flood of money from Washington, heroic efforts on Wall Street and a surge in patriotism and consumer gusto still could not stop a malaise from setting in this year.
Americans discovered the real causes of their economic troubles: excesses from the bubble in technology and the stock market in the late 1990s. These had emerged well before bin Laden began his war on America and its economy.
The bursting of the economic bubble and ensuing events proved to be far more troubling to the economy and people's finances than the attacks.
Starting in December, the collapse of Enron Corp. triggered a string of revelations about falsified financial statements and a series of major corporate bankruptcies that shattered the faith of investors. Stock market indexes fell to five-year lows this summer.
"The erosion of investor confidence in corporate America caused by high-profile accounting scandals, executive misdeeds and other failures of corporate governance has had a greater impact than the tragic events of September 11th," Ms. Tillman said.
The maladies turned out to be related more to the homegrown excesses than a cabal of foreign terrorists. It was not the outcome that most Americans expected.
Withstanding the shock
The estimated $100 billion in economic losses mostly to insurance companies, air travel and New York businesses simply were not enough to overwhelm America's $10 trillion economy.
"The economy has displayed a remarkable ability to withstand a shock of this magnitude," said Ross DeVol of the Milken Institute, whose estimates of $100 billion in direct damages from the attacks and $2 trillion in short-term stock losses were widely quoted last year.
Some economists had feared billions or trillions more would be lost through indirect damages including lost sales around the world as consumers hunkered down and curbed spending, and lost productivity as businesses ratcheted up spending on insurance and security needs that increased costs but added nothing to revenue.
Mr. DeVol pointed to several "mitigating factors" that led to far fewer ripple effects than many had anticipated.
"First, the Afghan part of the war against terrorism went better than almost anyone expected. The Taliban and al Qaeda were pushed out faster and with fewer American casualties than anticipated. So the negative psychological impact on the American population particularly on consumers was negligible," he said.
The innovative response of American businesses particularly the aggressive zero-rate financing offers by automakers last fall also cushioned the impact.
Since "domestic car travel has replaced air travel," he said, "car sales fell in the immediate period after the attacks, but rebounded late in 2001 and stayed remarkably strong."
The Fed's rate cuts, mass refinancings and "well-timed personal income-tax cuts" increased the wherewithal of consumers to spend something they proved all too willing to do, at times out of a sense of patriotic duty.
The $40 billion of tax rebates that President Bush had pushed through Congress in the spring of 2001 turned out to be particularly fortuitous, Mr. DeVol said, "offsetting much of the loss of stock market wealth."
Travel and tourism suffer
"Unfortunately, the impact on the principally affected sector of the economy travel and tourism was very close to our estimates," Mr. DeVol said. "American tourists cut back on long-distance travel, principally by air. Business travelers have not returned to the skies," and foreign visitation remains down by 25 percent.
Air transportation employment dropped by 76,800, 43,600 aircraft manufacturing jobs disappeared and thousands more jobs were lost at travel agencies.
Occupancy rates in the hotel industry dropped to the lowest levels in 75 years, and Mr. DeVol is predicting total job losses of 123,300 in that industry this year.
Restaurants and bars particularly in destinations like New York, Washington and Hawaii are expected to cut about 135,600 jobs this year, he said.
Both Americans and foreign tourists seem to have lost some of their zest for fun and games since the attacks, leading to a loss of 118,700 jobs in the recreation industry, he said. Las Vegas has not suffered as much as expected, apparently because it is within driving distance for many gamblers.
Reno, Nev., Atlantic City, N.J., and Myrtle Beach, S.C., among various resort destinations, also have sustained business better than expected because of their accessibility by car.
On the other hand, a greater-than-anticipated loss of foreign visitors is affecting such major tourist destinations as Washington, Honolulu, Seattle, San Francisco, Orlando, Fla., the home of Disney World and Flagstaff, Ariz., adjacent to the Grand Canyon.
"The advertising industry did witness a major decline in ad revenues, but most of it was due to the tech and stock market meltdown, not 9/11," Mr. DeVol said. "Theatrical productions won't be impacted quite as severely as expected, either."
The Milken Institute estimates a total loss of about 673,100 jobs nationwide as a result of the terrorist attacks. That equals about 40 percent of the 1.7 million jobs lost during the recession.
Some of those losses were offset, however, by the hiring of 40,000 air transportation security workers by the federal government, as well as thousands of jobs in defense and private security services.
Damage was uneven
A look at individual industries affected by the attacks also reveals some winners and many losers.
For retailers, the attacks accelerated a shift away from discretionary purchases and toward discount merchandisers like Wal-Mart and Target, penalizing higher-priced department stores and luxury outlets. Meanwhile, sales at home-improvement stores, auto-parts dealers, and crafts and home-furnishing outlets soared.
In the energy area, the threat of a war against Iraq and other countries harboring terrorists has added a premium of about $6 a barrel to oil prices, boosting major producers like Exxon Mobil Corp. and ChevronTexaco Corp.
But the power industry was devastated by lower demand and soaring insurance costs for plants seen as potential terrorist targets, said Standard & Poor's analyst Peter Rigby.
"The terrorist threat against power plants is indeed real on a global scale" and will continue to loom over the industry, he said. "In August 2002, Pakistani police arrested six Islamic hard-liners who were planning to attack a thermal power plant owned by AES Corp." AES is based in Arlington.
September 11 caused the largest insured losses in history for the property and casualty industry, estimated at between $30 billion and $60 billion. Yet the life insurance industry had a 15 percent sales boost in the quarter after the attacks, according to S&P.;
Within a month of the attacks, a Harris poll found that 6 percent of the population had bought life insurance for the first time or increased their coverage.
The ultimate loss to property insurers will take years to assess, as many World Trade Center victims have yet to file claims. About 20 percent of the more than 3,000 households who lost relatives in the attacks chose to forgo lawsuits and tap a government compensation fund set up for survivors.
While the insurance industry has enough reserves to cover the damages, it has moved quickly to exclude terrorism coverage from policies in the future or drastically raise its cost. That created a major headache for power plants, municipalities, commercial builders and others.
Some landmark buildings, "trophy" infrastructure and municipal facilities, theme parks, and sports stadiums have had to go without coverage because of the "eye-popping" costs, the credit agency said, posing immeasurable risks for the facility operators and users.
Both houses of Congress have passed bills to provide backstop federal insurance coverage for terrorist acts, but the legislation remains stalled because of major differences between the bills.
The White House estimates that lack of insurance coverage has caused the cancellation of about $6 billion of construction projects this year and is holding back a recovery in the battered commercial building industry.
For businesses, the higher costs for insurance and heightened security couldn't have come at a worse time, when the United States was experiencing one of its worst profit recessions in history.
The Bush administration estimates that extra security will cost U.S. businesses as much as $100 billion a year part of that triggered by new government rules, such as stringent security standards for airlines and owners of chemical and power plants.
With consumers bargain hunting more than ever, businesses have little wherewithal to pass their higher costs to customers, forcing many to absorb losses and contributing to the past year's record-breaking number of corporate bankruptcies.
The ultimate economic cost of the government's fall from a $127 billion surplus last year into a $157 billion deficit this year, in its rush to provide aid and defense for stricken Americans, also is not known.
Higher debts eventually will lead to higher interest rates and lower growth, economists say. It raises questions about the solvency of Social Security at a time when retirement savings have been devastated by $7 trillion of stock market losses.

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times is switching its third-party commenting system from Disqus to Spot.IM. You will need to either create an account with Spot.im or if you wish to use your Disqus account look under the Conversation for the link "Have a Disqus Account?". Please read our Comment Policy before commenting.

 

Click to Read More

Click to Hide