Attacks shake foundations of fragile economy

October 01, 2001 |

The long-term impact of the events of Sept. 11 remains a great unknown, although the negative short-term implications for consumer and business confidence are clear.

Given the enormous potential for severe economic disruption and global recession, the outlook will be re-evaluated once the full political and economic implications become known in the weeks and months ahead.

Negative short-term effects

The initial economic impact is decidedly negative. Early estimates of damage to buildings and physical infrastructure in lower Manhattan approach $25 billion. Economic activity around the nation has been severely disrupted, with the most dramatic immediate impact on the travel, financial services and communications industries.

Private economic forecasting groups are estimating that 1 full percentage point will be shaved from third-quarter gross domestic product (GDP). The U.S. economy was walking a tightrope during the July through September quarter, following the scant 0.2 percent growth in real GDP recorded during the second quarter of this year. Then came the devastation on Sept. 11. Consequently, there's little doubt that GDP will decline during the third quarter of 2001 — the first time that the nation's economic engine has stalled since the first quarter of 1993.

Although the short-term impact of the terrorists' attacks is painfully evident, the medium-term implications will depend upon factors that can't be forecast with any degree of confidence. Of overriding importance is the timing and nature of the forthcoming U.S. military response — and the scope and nature of the almost-inevitable counter-response by terrorist groups or sympathetic governments.

The longer it takes to effectively respond to the attacks and to neutralize the threat of widespread global terrorism, the more significant the economic disruption. Damage would be exacerbated should a "circle the wagons" attitude or "bunker mentality" develop among consumers, businesses and investors. The timing and generosity of economic aid from the government, insurance payouts and financial contributions from individuals and private institutions also are factors.

Response key to recovery

The most optimistic economic scenario is predicated on the expectation that policymakers will quickly succeed in their diplomatic and military response to the international network of terrorism. This would preclude the United States from being drawn into a protracted military action, and would limit long-term damage to consumer and business confidence.

Under these assumptions, the negative economic fallout would be large and measurable — about $60 billion to the overall economy, according to current private estimates — but almost entirely concentrated over the final third of 2001 and into the first few months of next year. Should the U.S. military response drag on, casualties mount and success remain elusive, a very different economic scenario would unfold.

Although the odds that the global economy could fall into a protracted downturn have increased substantially, a combination of luck and skillful policymaking could see the country through this national crisis — bruised, battered and changed forever, but standing. A full-blown recession is not inevitable.

The chances that building and construction markets will fare even better during 2002 have improved. Interest rates have moved lower and substantial monies have already been appropriated for rescue, recovery and cleanup.

As in the wake of hurricanes and earthquakes over the past 15 years, this unnatural disaster will undoubtedly see a great deal of government, insurance and private funds quickly appropriated for rebuilding and repair — a real, if unwelcome, net economic stimulus to the industry. Of course, this dubious positive would be overwhelmed should the events of Sept. 11 prove to be simply the horrifying prelude to more pervasive global conflict precipitated by follow-up acts of biological, chemical and cyber terrorism.

Should the events of that day be overcome, the prospect of America rising in defiance of the terrorists will provide the opportunity for architects, engineers and developers to make a dramatic and profound statement about the steadfast determination of the United States to resist the enemies of freedom and democracy.

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