Economists fear attacks could cause recession

WASHINGTON – The terror attacks in the nation’s business and government capitals may well push the teetering economy into recession, analysts suggested. The Federal Reserve said it stood ready to pump extra money into the economy if needed to try to avert such a development.

The Fed’s promise to supply additional money to the banking system was similar to a pledge it issued on the morning after the October 1987 stock market crash. That action, only two months into Alan Greenspan’s tenure as chairman, was credited with keeping the economy out of recession.

However, private analysts said the Fed’s magic of lower interest rates and ample supplies of cash to the banking system may not be enough to overcome Tuesday’s series of attacks, which occurred at a time when the economy was already struggling and consumer confidence was faltering.

“The economy has been on a high-wire act straddling between a recession and anemic growth. Now the terrorists have cut the wire underneath our feet,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “The United States and the rest of the world are likely to experience a full-blown recession now.”

The concern is that consumers will cut back further on their spending.

Consumer spending accounts for two-thirds of the nation’s economic activity. Even before Tuesday’s attacks, signs of trouble were evident as Americans grew more worried about their jobs with each new rash of layoff announcements.

The government had reported last Friday that the unemployment rate shot up to 4.9 percent in August as job losses in manufacturing climbed above 1 million.

The overall economy grew by just 0.2 percent in the April-June quarter, the poorest showing in eight years. Before the terrorist attacks, many analysts had been forecasting a rebound to around 1.5 percent growth in the gross domestic product for the current quarter, helped by seven interest rate cuts from the Fed and nearly $40 billion in tax rebate money being mailed to Americans.

But economists said the terror attacks, in addition to hurting consumer confidence, could disrupt the economy in a variety of ways, including severely curtailing air travel, which especially would harm areas that depend on tourism.

“There is no economic good that comes out of this. It is just a question of how bad will it be,” said Mark Zandi, chief economist at Economy.com. “It is now likely we will get a negative GDP number for the third quarter, given all of the economic disruptions that this is creating with a shutdown of the transportation system and the financial markets.”

The Fed’s promise to supply extra money to the banking system is an attempt to assure depositors that no bank will get caught without adequate resources to meet its normal operating needs.

Zandi predicted the Fed would follow that with further cuts in interest rates.

The Fed already had reduced its key benchmark rate, the federal funds rate, seven times so far this year, the last cut occurring at its Aug. 21 meeting.

The Fed next meets on Oct. 2 although some analysts said the central bank may feel a need to deliver a positive jolt to markets with an intermeeting rate cut, something it has already done twice this year.

Greenspan, who had been attending a banking conference in Basel, Switzerland, was on a plane returning to the United States when the terrorist attacks on the World Trade Center occurred. His commercial flight, along with other international flights to the United States, was diverted. A Basel police official said Greenspan’s flight had returned to Switzerland.

Fed spokesman Dave Skidmore said Greenspan was on the ground at a location he refused to disclose for security reasons. Skidmore said Greenspan was being kept fully apprised of developments through a monitoring team assembled at Fed headquarters in Washington operating under the direction of Fed Vice Chairman Roger Ferguson.

William McDonough, president of the Fed’s New York regional bank, who was with Greenspan at the Switzerland conference of the Bank for International Settlements, said Fed officials were striving to make sure essential banking operations were not disrupted.

“The New York Fed will make every effort to conduct business as normal,” McDonough said in a telephone interview with Dow Jones Newswires. “I am sure that central bankers everywhere will do everything possible to maintain calm and seek to ensure the world economy functions smoothly in the face of this horrendous deed.”

As the Fed sought to reassure the country that the nation’s banking system was safe, Harvey Pitt, chairman of the Securities and Exchange Commission, issued a statement saying that they closing of financial markets on Tuesday was a “temporary phenomenon. Trading will resume as soon as it is practicable to do so.”

Officials said late Tuesday that the New York Stock Exchange, the Nasdaq Stock Market and the American Stock Exchange would remain closed at least through Wednesday.