Uncertain outlook for U.S. economy

NEW YORK, SEPT. 13. The World Trade Center tragedy cancelled all forecasts about the American economy. And whatever happens next in the U.S., in turn, will inevitably affect the global economic outlook.

Until Tuesday, the economy's future, whether it would revive or dip into recession, rested on whether layoffs would inhibit consumer spending, whether business investment would revive, whether home construction and home prices would stay up. Now, what happens next to the American economy depends on how the public reacts to Tuesday's terrorism, economists said.

The big issue, beyond the huge initial costs of repairing damage caused by the attack, centres on whether American consumers might stop spending until they know who is responsible for the assaults and whether they might happen again. ``Uncertainty causes people to seek information and suspend their judgment, and I think that will affect buying behavior initially," said Richard T. Curtin, director of consumer surveys at the University of Michigan. ``People are going to be fearful of public places for a while, and they are going to stop going to car dealerships and malls. And that is likely to cause a decline in consumer spending."

In the past, cataclysmic events often affected the economy's direction. The Persian Gulf crisis, for instance, with its war jitters and higher oil prices, helped to bring on the 1990-91 recession, while Pearl Harbor forged a national consensus to spend huge amounts of money to defeat Germany and Japan - and the economy boomed. This cataclysm, however, is different: No one yet knows who the enemy is or what the group, or groups, may do next.

That changes the economic debate. Preserving the budget surplus is now likely to fade as an issue, several economists said, as the government makes a priority of repairing the damage and increasing security. Replacing what was lost at the World Trade Center is likely to cost billions of dollars - not only in new buildings, but in reopening or replacing the numerous companies whose personnel were injured or killed and whose records were destroyed.

Although the rebuilding of the Pentagon and of offices in southern Manhattan could lift both the New York and Washington economies, the amount spent - in the low billions - would have relatively little effect on the $10 trillion national economy.

Beyond the physical damage, big segments of the economy are likely to be frozen for a few days or a week. Among those facing the largest losses are Wall Street firms, because the financial markets are closed. In addition, the airline industry faces tens of millions dollars in refunds to passengers unable to travel while aircraft were grounded. FedEx and United Parcel Service also were grounded on Tuesday.

In interviews with a dozen economists, most were reluctant to speak for the record about the economy on a day of such tragedy. ``I feel like there is so much human tragedy, you do not want to be thinking analytically or rationally about this," said Mr. James Glassman, chief domestic economist for J. P. Morgan Chase. ``But we know that soon we are going to have to think about the economy."

Mr. Glassman and a few other economists were optimistic. "This is going to make America, and the civilised world, be defiant," Mr. Glassman said. "People are going to see this as a threat to the civilized world, and good things are going to come out of it."

That was certainly the reaction to Pearl Harbor, on December 7, 1941, a Sunday. Stock prices fell steeply at first but recovered as the nation mobilised. The recovery, however, is not likely to come as easily this time, Mr. Glassman said. ``We are likely to be in shock and mourning for several weeks, and that means volatile markets and less consumption," he said.

The American economy has been weakening for a year. The gross domestic product barely grew in the second quarter, and in recent days, forecasters have been lowering their estimates of economic growth for the third quarter to an annual rate of less than 1 per cent. The unemployment rate shot up to 4.9 per cent in August from 4.5 per cent in July - a rise that shocked the markets.

Before Tuesday's tragedy, the Federal Reserve's policy makers were widely expected to lower interest rates at their October meeting for the eighth time this year. They may now step up that schedule. Alan Greenspan, the Fed's chairman, was flying home from a meeting in Switzerland when the terrorists struck, and his plane was turned back. But the Fed issued a reassuring statement noting in effect that it would supply credit as needed.

The lower rates had helped to sustain consumer spending, but now mood and psychology will almost certainly become crucial, said Mr. Humphrey Taylor, chairman of Louis Harris & Associates, the polling firm.

- New York Times

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