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The national economy was already in a weak
position before the terrorist's attacks of September 11, 2001.
Real Gross Domestic Product in 2001 expanded by only 1.3 percent in
First Quarter, and 0.3 percent in Second Quarter. Moreover, the unemployment rate nationally was 4.2 percent in
First Quarter, and rising to 4.5 percent in Second Quarter.
However, there were some faint signs that the economy was strengthening
and was poised for recovery. For
example it appeared that consumer and business spending were in the midst of a
mild recovery.
The events of September 11, 2001 put to an end
any speculation that the economy was poised for a quick recovery.
The consensus among economists is that Third Quarter and Fourth Quarter
of this year will experience decreases in real Gross Domestic Product.
This means that the national economy is headed for a recession.
From a historic perspective the recession is forecasted to be shallow
and brief when compared to the downturns of 1973-75, or 1981-82.
Most economists are forecasting that the recession will be more like
the ones experienced in 1969-70 and 1990-91.
Moreover, barring any additional unforeseen shocks to the economy,
growth will return to the nation by mid-2002.
The data suggests there was a sharp decline in
economic activity after the attack of September 11.
The decline in activity was primarily centered in consumer spending.
Especially hard hit were the airline and leisure industries.
Also firms that relied on just in time inventory practices experienced
a temporary curtailment in operations. Preliminary
reports suggest that there has been a rebound in economic activity since the
terrorist attack. However, the
rebound in activity has not been complete and activity remains depressed from
pre-attack levels.
In response to the situation it appears there
will be a massive amount of fiscal and monetary stimulus applied to the
economy. Changes in government spending and taxation should provide in
the neighborhood of $100 billion worth of stimulus. At the same time the Federal Reserve has continued to cut
short-term interest rates, and is rapidly expanding the money supply.
Under normal circumstances such a strong stimulus package would
be thought harmful to balancing the budget, and likely to rekindle
inflationary pressures. The good
news is that the current budgetary situation and low inflation environment
gives policy makers the latitude to respond to the current situation.
Moreover, in a time of war, winning the conflict takes precedent over
concerns about fiscal and monetary policy.
The events of September 11, and the subsequent
biological attacks have surely changed our nation's perception of economic
risk. Because of this
reassessment one can expect there will be an increase in the cost of doing
business and in economic activity. Higher
insurance premiums to cover the perceived risk level will likely take place.
However, and even more importantly, are the costs that will be incurred
to provide greater security for people and for physical assets.
Thus, we are likely to see resources allocated away from current
patterns to reflect the change in perceived economic risk and or personal
risk. This transition, however,
is not likely to be so great that it undermines the foundation of the economy.
The economic fundamentals that lead to a strong expansion in the 1990's
remain with us. Moreover, we are
just at the beginning of an information-technological revolution that will
enhance productivity growth and living standards.
People across time have had a tremendous capacity to adapt to
uncertainty and risk. Therefore,
it is not a matter of if, but rather when this adjustment takes place in the
minds of the people that will determine when the economy returns to its former
vibrancy.
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