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Economy in the balance
September 12, 2001: 2:14 p.m. ET

Strength seen hinging on consumer reaction in wake of attacks
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - The economies of the United States and the world are certainly at risk of recession after the terrorist attacks on New York and Washington, observers said Wednesday, but the long-term outlook for both is less clear.

In the United States, at least, the economic impact of terrorist strikes that destroyed the World Trade Center in New York, damaged the Pentagon near Washington, D.C., and likely killed thousands of people, will hinge on the reaction of consumers, whose spending fuels two-thirds of the world's largest economy.

Rescue efforts continued Wednesday in New York City.
"At this point, consumers can do one of two things," said Anthony Chan, chief economist with Banc One Investment Advisors. "Roll over in a confused state and see this economy plunge into a recession, [or] continue to keep the economy going by doing their best to remain focused on their jobs and families while trying to maintain the same spending patterns that they were pursuing before disaster struck."

"I hope and pray that consumers will work hard to stay close to the second path," Chan added, "because it is the right path to take in order to show our defiance against terrorism."

Representatives of U.S. and global economic institutions offered optimistic assessments of the world economy Wednesday morning, hoping to ease fears of imminent recession.

"Our financial institutions remain strong, and the American economy will be open for business as well," said President Bush in his address to the nation Tuesday night.

That sentiment was echoed Wednesday morning by Deputy Treasury Secretary Ken Dam, who said, "Acts of evil will not cripple the markets."

The International Monetary Fund, which pools together money from several different nations and uses it to support developing nations and stabilize currencies, said the international financial system was "fundamentally resilient."

"Our present assessment is that, despite the scale of the human tragedy, these terrible events will have only a limited impact on the international economy and global financial system," said IMF managing director Horst Kohler.

And the finance ministers and central bank presidents of the world's seven wealthiest nations, known as the Group of Seven (G-7), issued a joint statement saying they were "committed to ensuring that this tragedy will not be compounded by disruption to the global economy."

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But some observers fear it's already too late. Stock indexes in Asia plunged Wednesday as investors worried that the U.S. economy would fall, bring Asian economies down with it and trigger a global recession.

"We're going down to the bottom," said Andy Xie, an economist with Morgan Stanley in Hong Kong. "No one knows where that is."

Still, though Asian investors moved to "safe-harbor" investments such as cash, bonds and commodities, other markets showed hopeful signs of calm Wednesday.

Oil prices retreated after spiking in the hours immediately following the attacks, as oil-producing nations said the world's oil supplies were secure. Expensive oil could be especially threatening to the health of the global economy, a risk that could increase if the United States takes military action in the Middle East.

The U.S. dollar recovered from early losses against the euro and the yen, as the central banks of the United States, Europe and Japan moved to reassure banks that money would be available, and the U.S. Federal Reserve asked for limited dollar trading.

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The Fed, the U.S. central bank, has cut interest rates seven times this year in a bid to keep consumers spending and avoid a recession, commonly defined as two consecutive quarters of negative gross domestic product, the total output of goods and services in the United States.

Fed Chairman Alan Greenspan
So far, their efforts have worked, but Tuesday's attack raised speculation that the Fed would have to cut rates again, at or before its next scheduled policy meeting Oct. 2.

"I think it is clear that, whatever the economic outlook was on Monday, the outlook is shakier now, and there are stronger arguments for cutting rates," said Bill Cheney, chief economist with John Hancock Financial Services.

Some observers are concerned that such a cut could be seen as a sign of panic on the part of the Fed, but others think it would more likely have a calming effect on consumers.

"It would be kind of like when they put through a substantial emergency rate cut when the market crashed in 1987," Cheney said. "I don't think it is evidence of panic to treat what happened yesterday as an emergency. It's an emergency on many levels."

On Wednesday, the Fed added an unusually large $38.25 billion in temporary reserves to the U.S. banking system and said it would add more reserves as necessary.

"Discount window borrowing [Tuesday] was substantially elevated above normal levels," a Fed spokesperson told CNN, but "the lending proceeded smoothly." The Fed also said Chairman Alan Greenspan was returned to Washington, D.C., in a military aircraft Wednesday afternoon. He was in Switzerland when the attacks occurred.

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The New York Stock Exchange, the American Stock Exchange and the Nasdaq Stock Market were closed Wednesday for the second straight day and will be closed until at least Friday and possibly until next Monday.

Unfortunately, the destruction of the World Trade Center and the severe damage to the surrounding area could put a damper on financial activity in the United States for days, if not weeks. Several financial services firms including Morgan Stanley Dean Witter Co., the center's largest tenant had offices there, and the nearby offices of the Wall Street Journal, a prominent source of financial news, apparently were completely destroyed.

"It is unclear how much financial infrastructure has been damaged," said Sung Won Sohn, chief economist at Wells Fargo & Co. "At least temporarily, the financial system could be frozen, further damaging the economy."

U.S. stock futures plunged after the first airplane hit the World Trade Center in New York Tuesday morning and trading was halted. U.S. stocks are likely to fall when trading finally resumes, as they did around the world Tuesday.

"There's been no shortage of negative news lately, and this event is likely to further depress the markets," said Alan Ackerman, market strategist at Fahnestock & Co.

Ackerman, as many others have, compared the tragedy with the Japanese surprise attack on Pear Harbor on Dec. 7, 1941. If history is a guide, U.S. markets could rebound after these attacks just as they did after Pearl Harbor.

"As the United States mobilized and expressed its resolve in the ensuing days, the stock market came back," Carl Weinberg and Ian Shepherdson, economists with High Frequency Economics Ltd., said in a research note. graphic

- Alex Frew McMillan and wire services contributed to this report


Insurance costs from WTC attack too early - Sep. 12, 2001

Oil, gold prices pull back from Tuesday's gains - Sept. 12, 2001

Central banks move to keep financial markets working - Sept. 12, 2001

Firms trying to account for workers - Sept. 12, 2001

Federal Reserve makes money available after attacks - Sept. 12, 2001

A look at the U.S. stock market's reaction to historical events - Sept. 11, 2001

Planes destroy World Trade Center - Sept. 11, 2001

NYSE, Nasdaq close after attacks - Sept. 11, 2001

Oil and gold prices spike - Sept. 11, 2001

U.S. dollar sinks against euro, yen after apparent terrorist attacks - Sept. 11, 2001

U.S. unemployment hits 4-year high - Sept. 7, 2001

GDP grows at 0.2 percent in 2Q - Aug. 29, 2001

Fed cuts interest rates a quarter point; seventh cut in 2001 - Aug. 21, 2001

  RELATED SITES - World recession now a strong threat - Sept. 12, 2001 - Bush promises justice for terror strikes - Sept. 12, 2001 - Nikkei closes below 10,000; Asia down sharply - Sept. 12, 2001

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