Economic Impacts of the World Trade Center and Pentagon Attacks. (Forum on Emerging Issues)
Ford, William F., Business Economics
Business economists have new responsibilities and opportunities to help their organizations cope.
This note presents a preliminary assessment of the major impacts on the U.S. economy flowing from the World Trade Center and Pentagon attacks. (1) It includes analyses of the attack's immediate and likely longer-term effects on the economy, at both the macro- and microeconomic levels. The note closes with a brief discussion of the new responsibilities and opportunities the attack has engendered for business economists. Because only a few weeks have passed since the event, much of the ensuing discussion may best be viewed as a rough sketch of tile main lines of inquiry that business economists are likely to pursue as the actual short-term and likely longer-term effects of the attack come into sharper focus.
Even at this early stage of recovery from the attack's initial impacts, it is clear that our nation is embarked on a significant transition in its basic socioeconomic milieu. Before the event, our economic environment was clearly not terror-immune. But it was relatively terror-free compared to some other advanced and many emerging economies. Thus, consider what will probably happen if and when political scientists create a terror-threat scale, assigning relatively terror-free countries (such as, say, Canada and Switzerland) low scores of one or two; while heavily terror-prone societies (such as Israel and Sri Lanka) receive scores of 9 or 10. On such a scale, its is quite likely that the U.S. has moved from, say, the 2-3 range of perceived terrorism threats to, say, the seven or eight level. That transition, in turn, causes major shifts in both the macro and microeconomic milieus in which American households, governments, and corporations play out their assigned economic roles. It also is likely to give rise to significant secular changes in our role in the world economy.
Near Term Impacts
At the macroeconomic level, NABE's forecast panel (October 2001) has concluded that the near-term outlook for our economy has turned sharply negative, with the majority holding that the U.S. economy is now and will be in a recession for the third and fourth quarters of 2001. The attack itself has caused a drop in consumer confidence and employment loss in the transportation, tourism, and entertainment-related industries.
Because each one-tenth of a percent reduction in GDP growth erases about $10 billion of output, the lost growth in the re-forecast far exceeds the estimated $20-plus billion in direct costs of the attack, even in the short-run. Unemployment, reflecting its usual role as a lagging indicator, is also now virtually certain to breach the six percent level. Corporate profits also continue to decline, as a nascent cyclical surge of corporate cash crises and bankruptcies mounts, while venture capital financing has fallen to historically low levels. (Wall Street Journal, 10/8/01 and 10/9/01) Finally, the attack's impact on the stock market has of course erased hundreds of billions of aggregate market value of listed U.S. companies
The only relatively bright spots on the aggregate demand front lie in the consumer and government spending arenas. Although consumer confidence trends have been generally negative since the attack, retail sales have continued to register small but positive gains on a year-over-year basis, thus far. And fiscal stimulus, at the federal level, has already risen sharply as both disaster recovery and military spending increases have surged, while tax collections are lagging. The fiscal-drag effects of federal surpluses have thus been mitigated while the Federal Reserve is doing its part in fighting the recessionary impacts of the attack by driving short-term real interest rates to near-zero and by pumping in huge amounts of bank reserves.
On the microeconomic level, the attack has dealt well-publicized and severe short-term blows to a number of major industries including the airlines, hotels, travel agencies, upscale restaurants, the entertainment sector, and suppliers of goods and services to those industries. …