Any sensible answer has to begin with a look at the economic damage of September 11, and the numbers tell a hopeful story. Even though America virtually froze in its tracks after the attack, most economic indicators suggest a rapid return to normal. In fact, for all its horror, September 11 hardly registered as an economic shock, barely moving the statistical dials compared with the last great attack on America, Pearl Harbor. Even compared with the classic economic shocks–the oil-price hikes of 1973, 1980 and 1990–September 11 is shaping up as a mere blip with little lasting impact on fundamentals like employment, inflation and the structure of the world economy. “The economic aftershocks of 9-11 have substantially disappeared,” says Robert Litan, an economist with the Brookings Institution.
What we’re left with is a nagging sense that in some way, perhaps inexpressible in the hard numbers favored by the dismal science, the economy is not the same. September 11 was not a beginning, not in the way that the oil shocks launched the grim stagflation of the ’70s, or the positive economic shock of Pearl Harbor inspired a national mobilization that ended the Great Depression. But it was an end. The attacks have crystallized a major rethinking of how the global economy works, killing any lingering hope that high tech could boom again, or that a new, improved U.S. economy could grow at a 5 percent pace forever. They have placed a cap on our sense of the possible.
Yet while the attacks accelerated a downturn already underway, they probably quickened recovery as well, by provoking the U.S. Federal Reserve to cut interest rates more dramatically than it would have. “September 11 brought all this to a head,” says Philip Barleggs, head of asset allocation for Rothschild Asset Management in London. “It was a defining moment.”
By blotting out the memory of the roaring ’90s, September 11 shut the door on a return to unbridled optimism and launched an era of common sense. The dot-com bubble turned out to be little different from other asset bubbles, like Japanese real estate in the 1980s or the American railroad boom of the late 19th century. Fundamentals hold true: economic cycles exist, markets can fall and companies eventually have to make money. The spread of digital technology will boost productivity as companies learn to design operations around it, just as they did long ago with the electric motor. But the boost won’t be nearly as big as the cheerleaders had thought, especially not after September 11. The Dow had returned to its Sept. 10 level by Oct. 6, and investors have driven the market back up by $1.7 trillion, but with a new sense of value. There is less lust for growth, tolerance for risk, glorification of technology or raw faith in progress and humanity. It’s an era of tempered optimism.
To understand the evolution of the new realism, it helps to look at how the millennium recession started. Most of the downturns in the 20th century followed a similar pattern: consumer spending sparked inflation, and the Fed raised interest rates to contain it. This time, in an echo of 19th-century boom-bust cycles, a business-spending binge on hot new technology started it all. Companies poured hundreds of billions of dollars into computers and other hardware that promised to make them great fortunes in the “Internet future.” Stock markets soared on the dot-com dream, stoking the investment boom even higher. As the economy grew, makers of everything from videogames to espresso machines cranked up production. But when it became clear the boom was faltering, they stopped production and started selling from stock. The economy stalled last spring.
After two planes hit the World Trade Center, it felt, psychologically at least, as if the United States was falling into depression. Yet the pink slips to tens of thousands of workers from pillars of the corporate community like Intel and Lucent arrived only coincidentally in the immediate aftermath of September 11. The layoffs were products of the underlying recession, which now appears unlikely to send U.S. unemployment much higher than 6.5 percent this year, far from the peaks of 24.9 percent during the Great Depression or even 8.5 percent during the 1970s. In 1973 the fourfold increase in oil prices permeated the entire U.S. economy, causing inflation to soar and undermining not only the value of the dollar but also the postwar system of international finance and exchange built on it. In the past few months, by contrast, the dollar has remained stable, making it easier for the United States to cut interest rates without inflation and, perhaps, lead the world out of recession. “The damage produced by September 11 does not compare to the oil shocks, when the adjustment to wealth was colossal,” says Harold James, an economic historian at Princeton University.
Against a backdrop of steeply falling economic indicators last fall, September 11 produced a mere statistical blip. Industrial production was already in the fourth quarter of a decline that accelerated only slightly after the 11th. Semiconductor sales are a good bellwether of change because they were seen as critical drivers of America’s “miracle economy” in the late ’90s. In November chip sales were down 42 percent from the previous year, but the Semiconductor Industry Association says that the terrorist attacks accounted for only 1 percent of that decline. Jeff Weir of Silicon Valley-based National Semiconductor, which makes chips for cell phones and PCs, saw orders drop way back in November 2000. “We wouldn’t attribute any of our economic changes to the attacks,” he says.
Despite the broad shutdown of the American economy in the days after the attacks, the losses since have been isolated and temporary. Sectors in the direct line of fire, like airlines and airline manufacturers, took an enormous hit. But others rebounded quickly. Art Spinella, an auto-market researcher in Oregon, says car sales tanked in late September, then rebounded dramatically in October before returning to the pre-September 11 trend line. In short, the attacks had “no impact,” he says. Don Wainwright, CEO of Wainwright Industries, a St. Louis manufacturer of auto and aircraft components, says that despite the transport “paralysis” after the attacks, it was a minor disruption amid already sharply falling sales. “I don’t think 9-11 is a factor,” he says. In retail, customers quit shopping for a few days after the attacks, then returned with a new sense of frugality; but this Wal-Mart effect is already wearing off. Wendy Liebmann, president of WSL Strategic Retail, says retail spending is back to pre-September 11 levels.
Economists are starting to debate the shape of the recovery. Because the nature of the downturn was distinct from any in the 20th century, they are even more confused than usual about how the rebound is likely to chart. Will it look like a V or a U? A bathtub or a saucer? Or perhaps a double dip, as Federal Reserve chairman Alan Greenspan has warned–would that be a W? The best guess would appear to be that recovery will be more gradual than usual. Because consumers stopped spending only briefly on and after September 11, they have not amassed the savings that normally fuel recovery. And because businesses were so badly burned by their spending excesses on Internet hardware, they’ll be slow to get back in the game. In the deeper recession of 1982, production bounced back within nine months. But this time around “it will be ugly,” says Jerry Jasinowski, president of the National Association of Manufacturers, predicting it will take two years for manufacturing to recover. Many economists predict a 4 percent growth rate by the fourth quarter of this year, compared with a bounce twice that high in previous postwar recovery periods.
The new, restrained economy fits into a much larger picture. Paul Donovan, global economist with UBS Warburg in London, argues that September 11 is a one-off shock that will not affect worldwide inflation. It simply marks the end of a four-decade detour from an inflation trend that UBS tracks back as far as 13th-century England. Inflation picked up in the 1960s with U.S. spending for the Vietnam War and the Great Society programs, and accelerated with the oil shocks. It started to slow during the 1980s, as worldwide competition provoked by the Reagan revolution brought prices down. September 11 won’t change this historic trend, which will also temper optimism, albeit gradually. “Lower inflation will mean lower returns, but that’s difficult to get across to investors psychologically,” says Donovan.
The pace of globalization was slowing due to the recession even before September 11, and slowed a bit more after. Foreign direct investment plunged by 50 percent last year from a high of $1.3 trillion in 2000, but had been expected to drop by 40 percent even before 9-11. The World Trade Organization had figured trade growth would slow by 10 points in 2001, after a 12 percent boom in 2000, and knocked another point off that estimate after the attacks. Bearish economists emphasize the multibillion-dollar significance of even such marginal shifts. Tallying up the fear tax imposed by rising shipping, insurance and other costs, Morgan Stanley chief economist Stephen Roach concludes that September 11 has thrown “sand in the gears” of global commerce (following story).
The consensus, however, seems to be that globalization will quickly wash away the rubble of September 11. When companies can’t raise prices at home, they look to source from the cheapest place possible. And prices remain lower outside the United States, partly due to the strong dollar. PriceWaterhouseCoopers surveyed executives at 171 large U.S. multinationals in November, and found that 27 percent plan global expansion this year, a rise from 19 percent before the attacks. Consultants at A.T. Kearney surveyed executives at 1,000 of the world’s largest companies after September 11 and found that although 95 percent were more concerned about the global economy than they had been a year ago, two thirds had no intention of scaling back overseas investment.
The tempered optimism is perhaps most keenly felt in the New Economy debate: can digital technology permanently raise the level of growth? The answer is now a restrained yes–but restrained more by new data than by terrorism, argues Harvard economist Dale Jorgenson. Estimates of U.S. productivity growth in the late ’90s were recently revised down from 3 percent to 2.36 percent. The good news is that productivity is still rising, and that has never before happened during a postwar recession. Since productivity is the key to economic growth, most economists figure the United States can now hum along at about 3 percent growth without overheating. That’s much slower than the New Economy of the late ’90s. But it’s still faster than the 2.5 percent annual average between 1973 and 1995. Moreover, an upcoming study by Brookings’s Robert Litan and Hal Varian at the University of California, Berkeley, predicts that further advances in business use of the Internet will add 0.4 percent to yearly productivity growth over the next decade. “The New Economy lives on,” says Litan.
Of course, the prevailing sense of optimism assumes that September 11 was what Global Business Networks CEO Peter Schwartz figures to be a “one-shot horror.” The futurist who coined the term “Long Boom” to describe America in the 1990s, Schwartz warns, however, that one could easily spin out a scenario in which war spreads, violence escalates and chaos disrupts growth. The Hudson Institute think tank is sponsoring a conference next week on the economic impacts of September 11, and it will examine three scenarios: the war on terror recedes into history, becomes a way of life or escalates into a global nightmare.
