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There is a continued effort to minimize the impact of the September 11 events on the economy. Gary S. Becker (Business Week, October 22, 2001) suggests that Kobe’s quick recovery from the 1995 earthquake implies that the economic downturn will be brief, and the recovery will return the US economy to previous growth rates. The difference is that the Kobe earthquake did not disrupt world air travel or require security precautions that will impact efficiency.
It is accepted that the economy is in decline; the questions are how deep the recession will be and how long it will last. Layoffs in industries beyond the travel and tourism industries suggest that, at least for some, the recession has already started. Many firms are in their second or third round of layoffs. The size and the strength of the US economy insure that even in a recession most people can find work that want work. Even as the unemployment rate increases, most of those desiring work will have jobs even if some may be earning less than previously.
However, layoffs, even if most jobs appear safe, will impact the confidence and the spending patterns of both those working and those laid off. Others, even though working, may find their income reduced because they depend on commissions, or as a small businessperson or individual service provider may have less business. While consumers do not change their buying habits until the layoffs appear long term or they are unable to find a job quickly, for those who have already lost their jobs, their spending will be eventually curtailed. For those still with jobs, their confidence will be eroded, and they are likely to begin to restrain their spending unless the situation improves for their company.
The recovery of the economy depends less on government action, lower interest rates and spending and tax cuts, than on restoring consumer confidence. It is disappointing to see Congress use this tragedy to reward friends and supporters through tax cuts rather than to put money into the hands of those individuals and industries that would create jobs. How quickly consumer confidence will return depends on the success of the Afghanistan effort and the effort to identify and stop the anthrax scare. The longer the war with Afghanistan continues, the more likely the consumer will curtail activities and spending.
The performance of the economy and the stock market are linked over the long-term, but the value of individual company and industry stocks frequently deviate from their long-term value. Computer-related stocks have improved on the hope that Microsoft’s XP operating system will revive investment spending in technology firms. XP does not appear to provide enough extra value for business to quickly upgrade. Its promises of improved stability sound familiar, but with profit concerns, the upgrade of computer hardware and software are easily deferred.
On the plus side for the stock market, on a recent driving trip across the US this author observed a more realistic attitude about stocks. Investors have changed from what they will do when the market rebounds to if the market rebounds. This is a healthy change in attitude on the part of investors. It implies they realize that stocks have a value that’s related to their financial performance, not “pie in the sky” promises.
With the market at current levels there appears to be some bargains, assuming the economy can recover from the terrorist attacks quickly. I think it is going to take longer and be more costly than most projections. I see the economy continuing to deteriorate and to take longer to recover. My optimistic outlook is for the economy to begin to recover by the third quarter 2002, assuming everything goes well with the efforts against terrorism.
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