Headline: There is no quick fix for this economy

Source: Susan Tompor [columnist], Detroit Free Press, 26 September 2001

URL: http://www.freep.com/money/business/tompor26_20010926.htm

As much as we'd like everything to get back on track quickly, the economic soothsayers say it won't happen. Six months from now, we're still likely to be in a mess.

Tuesday's economic downer: A New York-based business group, the Conference Board, reported that consumer confidence plunged this month, experiencing its largest monthly decline since October 1990, just two months after Iraq invaded Kuwait to spark the Persian Gulf War.

Based on the Consumer Confidence Index numbers alone, we're the least confident we've been in nearly six years. The survey results forced even once optimistic economists to throw in the towel and acknowledge that a recession is under way.

"The average person is telling us we're close to a recession," said Ken Goldstein, economist for the Conference Board in New York.

Consumers who are shocked by the terrorist attacks on Sept. 11 -- and don't know what's next -- are not likely to spend on cars or trips or homes or stocks. And it doesn't help that the economy looked bad even before the attacks on the World Trade Center and the Pentagon.

Consumer spending accounts for about two-thirds of the nation's economic activity. And up until now, the consumer has kept our economy out of a recession.

But now, the confidence survey shows a more skittish consumer. The Consumer Confidence Index sank to 97.6 from a revised 114.0 in August. The survey is based on a sample of 5,000 U.S. households. The index compares results to its base year, 1985, when it stood at 100.

Asked if they intend to buy a car in the next six months, about 7.3 percent of the consumers surveyed in September said yes. That's down from 8.1 percent in the August survey.

The New York group also conducted a special survey that dealt with the terrorist attacks. The survey involved a smaller sample of 750 households. Asked if they think the terrorist attacks will push the U.S. economy into a recession, 47.2 percent of those surveyed said "yes." And 11.4 percent said they'd postpone major purchases due to the events. Not exactly good news for car dealers and major appliance makers. And 20.5 percent said they'd postpone financial investments due to the attacks. Not exactly good news for investors who had hoped for a rebound.

"Everybody is very uncertain right now. They're probably not going to rush into the stock market," said David Blitzer, managing director and chief investment strategist for Standard & Poor's in New York. "It's a big wait and see game."

It only makes sense that consumers would be more cautious. "Consumers have to deal with a triple whammy right now. You have the aftermath of the attacks, rising joblessness and the big decline in the stock market," said Carl Tannenbaum, chief economist for Standard Federal Bank in Chicago.

The Dow Jones Industrial Average fell 14.25 percent last week. This week, we saw some gains. The Dow gained 56.11 points on Tuesday to close at 8659.97. But market watchers still expect volatility.

To be sure, most consumers are trying to put on their best face. Some say spending is patriotic. And most say they will not change plans. Larry Aliotta, 59, retired from Ford Motor Co. in February. All of his retirement money is tied up in Ford stock, which has fallen about 45 percent since mid-March. Yet, Aliotta, who has a pension, says he still plans to spend a month in Florida next March and visit Italy next May. "I'm not going to let anything change me," said Aliotta of Harrison Township.

But Lynn Franco, director of the Conference Board's Consumer Research Center, warned that more people are likely to cut back their buying plans once widespread layoffs materialize. And the key word, perhaps, in understanding why things won't bounce back quickly is layoffs.

Layoffs had been in the pipeline before terrorists killed thousands of Americans on Sept. 11. And the attacks hurt the economy further.

Theme parks, including Universal Studios in Orlando, have cut back hours for their workers following a drop in attendance since the attacks. Tech companies are laying off workers because they're seeing more of a slowdown ahead. And about 100,000 people are expected to laid off in the airline industry alone.

"We're now in a recession that was triggered by this event," said Diane Swonk, chief economist for Bank One in Chicago. As late as Sept. 7, Swonk had thought the economy was ready for a rebound in the near future.

Some consumers will have less money to spend. Times are so tough that Swonk said a cab driver dropped her off at her office in Chicago on Tuesday and then waited two hours to take her to the airport. He was that eager for a fare.

The downturn could well last for at least the next six months -- until fears settle, until lower interest rates work their way through the economy, until spending gets back on track.

"This is not going to go away any time real soon," Goldstein said. "This is more psychological than economic."

-- Andre Weltman (aweltman@state.pa.us), September 26, 2001