Recession fears mount

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The worst terrorist attack in U.S. history dealt a one-two blow to the economy that could tip the nation into recession, further depressing an already weakened ad market. The assault hit the physical center of the U.S. financial industry, but it also shook consumer confidence, the last pillar propping up the economy.

Gail Fosler, chief economist of the Conference Board, revised her forecast for a second-half recovery; the attack's impact on consumer confidence, combined with existing low confidence, will push the recovery into 2002, she concluded. The Conference Board, a business research group, issued a statement noting its monthly consumer confidence index is not due out until Sept. 25 but will include a before-and-after comparison.

A survey by Harris Interactive, taken after the terrorist attacks, bears this diagnosis of consumer unease. The poll, taken the evening of the disaster and the following morning, found 77% of adults said they would spend less and save more in the wake of the devastation. That throws a curve at plans to spur the economy by encouraging consumer spending with tax rebates and cuts.

"We were already growing barely.... This will keep September weak," said Stuart Hoffman, chief economist at PNC Advisors, Pittsburgh, Pa., who was at a conference next door to the World Trade Center during the attack but was unharmed.

Individuals will cut spending, especially on big-ticket items such as homes, autos and travel, said Liz Shamir, PNC's senior analyst. The lower spending will shrink gross domestic product in the third and fourth quarter-causing two quarters of negative GDP, the common definition of recession, said Mr. Hoffman.

"Yes, I think the short-term negative effects of the attack will be to tip us into recession," he said.

An analysis by Giles Keating, chief economist of Credit Suisse First Boston-admittedly in "a very crude assumption"-estimated U.S. GDP will drop at an annualized rate of 3% in the third quarter and the fourth quarter and that global GDP will dip at an annualized rate 0.75% in both periods. He noted air transport makes up 1% of U.S. GDP, New York City accounts for 6.1% and Washington, D.C., 0.6%, for a total of 7.7% of the nation's GDP.

GDP grew 1.3% in the first quarter of this year and 0.2% in the second quarter. The U.S. was last in recession in 1991, the year of the Persian Gulf War, when GDP fell 0.5%.

Several sectors are expected to feel the brunt of the aftershocks directly; financial, travel and leisure companies and other sectors could fall due to the gloomy consumer confidence after the attacks.

Advertising will suffer in the short term, but the long-term effect is not clear, said PNC's Ms. Shamir. She explained that even if TV networks lose revenue during the crisis, the make-goods they give advertisers will absorb the extra inventory in what was promising to be a weak scatter market, that could firm up prices in the latter months.

Advertising will recover faster than the capital markets, Ms. Shamir believes. She noted she recommends AOL Time Warner as a defensive stock investment and Omnicom Group as a quality holding among the agency stocks.

But the economy must now absorb a massive financial loss on top of the devastating human loss. The extent of the total monetary losses-estimated at between $15 billion and $20 billion-will make this the costliest disaster in U.S. history for insurance companies. And financial services companies, which already were battered by falling markets this year, also will face the effects of the longest trading shutdown since World War I and are expected to be battered by a panic selloff when trading reopens.

The financial companies preached the "don't panic" gospel aggressively to their clients in the days after the attack. Charles Schwab & Co. sent out an open letter and video message from Chairman-CEO Charles R. Schwab advising investors to take a long-term approach and not touch their stock holdings.

The letter reminded investors that in previous crises, the financial markets have come back stronger. For example, he noted the markets sold off for two-and-a-half months after the war in Kuwait a decade ago but went up 30.1% during the next 12 months.

However, some analysts pointed out the current situation doesn't lend itself to the same definite action as the Gulf War since this time there's no clearly defined enemy or quick military action to take. Additionally, the economy has changed dramatically in the last decade, which makes the comparison even more difficult, said James P. Dunigan, chief investment officer of PNC Advisors. But he and his colleagues held up the hope of a Gulf War-style recovery in early 2002. The U.S. economy bottomed in March 1991, just 1 month after that war ended.

The Conference Board report noted two main differences to the response to the invasion of Kuwait: The repeated cuts in interest rates during 2001 and the certainty the federal government will provide funds to help the recovery effort.

The Federal Reserve Board is expected to make an unscheduled rate cut before the Oct. 2 meeting of the Federal Open Markets Committee. Some analysts speculate the cut could follow shortly after the markets reopen to try to head off panic selling.

David Cole, director of the Center for Automotive Research, said in the short-term, auto sales will fall as people are preoccupied with the tragedy and its aftermath. "I don't think that will last," he said. "I remain optimistic over the longer term." He's encouraged that "we're getting a higher level of consensus out of Washington" that should result in "a better, higher-level of leadership."

Scott Corwin, a principal of consultancy A.T. Kearney, said the auto industry will be hurt in the short term, but the industry's sales until now have been "better than you'd expect," considering the general economic slowdown and low consumer confidence. He predicted incentives will stay for awhile until demand is stimulated or the economy rebounds.

Restaurant traffic could suffer from a "Gulf War Effect," said Bob Goldin, exec VP of food service consultancy Technomic, Chicago. Conversely, some fast-food restaurants, particularly takeout and pizza chains, could see a boom as people stay close to home, he said.

"When family and friends are gathered around the television, there is a tendency to see our business go up on those nights," said a spokeswoman for Tricon Global Restaurants, parent of KFC, Pizza Hut and Taco Bell.

Mr. Goldin said how long the industry might suffer is unclear, but he expects the entire travel and leisure segment will be affected. Said Mr. Goldin: "It's a concern, and the industry is shaky as it is."

Contributing: Tobi Elkin, Jean Halliday, Kate MacArthur

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