Economic Impact Of 911 Minimal
Rather, the economy hardly faltered.
Diane Swonk, the chief economist for Bank One, issued a statement last week that said the effects of the Sept. 11 attack upon the economy were much smaller than expected and that the economy has proved more resilient than initial analyses predicted.
“In that resilience is a lesson,” she wrote. “Our economy is not only the largest market-oriented economy that this world has ever seen, but also the most adaptable.
“It survived and — some would say ‘thrived’ — in the face of significant adversity.”
She said the current economy has a lot going for it, “including a monetary policy that remains accommodative, fiscal policy designed to stimulate, consumer spending expected to accelerate in the near future, and a push to enhance productivity.”
The result, she said, is an economy returning to the cycle of the mid-1990s in which growth initially came in the form of productivity gains and, afterwards, payroll gains. As a result, she predicted, unemployment will rise further before it falls.
Putting on her forecaster’s hat, she said the near-term will surprise many observes on the upside in terms of profit, equity market gains and a general sense of well being.
But, she cautioned, the good times probably will not roll into the euphoric frenzies of the late ’90s.
“Two years down the road,” she advised, “we could be more concerned about asset bubbles and inflation than falling equity markets and deflation.” Of late, some observers of the economy have speculated that the economy is entering a deflationary period.
Swonk says there’s no question that the 9-11 catastrophes had a fundamental economic impact. “Planes were grounded, stores were closed and plants were shuttered. Economic activity over vast parts of the country came to a virtual standstill in the hours and days that followed.”
In her own case, she said, she believed the attack would lead to renewed and deepening recession.
“Fortunately,” she said, “writing the economy off in late 2001 and early 2002 was a mistake.
“Not only was the economy more resilient than most expected, it was even more resilient than we expected. Instead of contracting, growth accelerated to its fastest pace in a year and a half in the fourth quarter of 2001, while growth in the first half of 2002 averaged close to 3 percent.”
This had been her staff’s prediction prior to the 9-11 attack.
What she said seemed to surprise all observers was that productivity growth — the foundation of the “virtuous cycle” of the 1990s — not only accelerated, but accelerated sharply.
“The response by businesses in the wake of September 11 was particularly abrupt,” Swonk wrote.
“They hunkered down, cut costs, and defended margins like we have never seen. And the resilience that we saw was even more impressive given the headwinds that the economy has faced in 2002:
- The crisis in corporate accounting.
- The highly symbolic Martha Stewart scandal.
- The uncertainty of the war on terrorism and its equivocation concerning Iraq.
- The collapse of equity markets under the weight of ‘overwhelming uncertainty.’”
Swonk said a great many people are skeptical and Wall Street remains skittish over talk of a double-dip recession.
But she said that’s not the economic consensus.
“It seems a good bet that those looking for a more pronounced recession or a ‘growth recession’ — a limbo between recession and recovery — will be pleasantly surprised.”
Among factors supporting continued recovery, she said, are:
- Inventories are low and need to be rebuilt.
- Obsolescence is beginning to work for high-tech production as firms begin to replace computers bought in 2000.
- The push to enhance productivity remains strong.
- Increased cash flow, in turn, should feed gains in equipment spending, “triggering a self-feeding cycle of gains in productivity and profit.
- Equity markets should rally as economic fundamentals overtake market momentum and anxiety.
- Growth between business and consumer sectors will become more balanced.
She said the long-term economic consequences of the terror attack lie not in the physical damage it did and the industrial stalls it caused, but in the long term.
She said the cost of the war on terror, the loss of fiscal discipline in Washington and the consequent increased monetary stimulus “ultimately will determine the contour of the economy, and could bring an end to what has been a remarkable cycle of ‘virtuous’ — low inflation-high profit — growth.”