Attacks Push Recovery Further Into Uncertainty

In the wake of the September 11 terrorist attacks on New York City and Washington, D.C., the most frequently asked questions of economists revolve around how these events will affect the U.S. and global economies, and whether or not they will make recession a sure thing. The truthful answer is that it is simply too soon to know the full implications. The economic impact depends first and foremost on consumer and business confidence.

However, a few observations can be made with some degree of confidence. Early estimates of damage to buildings and physical infrastructure in lower Manhattan approach $25 billion. Economic activity around the nation has been severely disrupted, especially in the travel, financial services, and communications industries. Private economic forecasting groups estimate that one full percentage point will be shaved from third-quarter Gross Domestic Product (GDP). The U.S. economy was walking a tightrope during Q3 following the scant 0.3% growth in real GDP recorded during Q2, and then the attacks took place. Consequently, there's little doubt that GDP declined during Q3—the first time that the nation's economic engine has stalled since Q1 1993.

The most optimistic economic scenario was predicated upon the hope and expectation that policymakers would quickly (i.e. by year-end) succeed in accomplishing at least their immediate objectives. This assumes both a diplomatic and military response while avoiding significant numbers of civilian casualties and minimizing any "backlash" response on the part of the global community of nations. This would preclude the U.S. from being drawn into a long-term 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 ($60 billion or so 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.