Global Recession Likely to Develop, Experts Say
A stark indicator of what is about to happen to the U.S. and world economies in the wake of Tuesday’s attacks on the United States was visible at the ports of Los Angeles and Long Beach as ships were held outside the docking areas of the nation’s largest port complex so vessels could be intensely inspected.
Such heightened security is necessary, but imposes a special tax cost on goods and services moving across the world. It also weakens economies, such as that of Southern California, that depend on world trade.
More than trade will slow in the aftermath of Tuesday’s terror. All commerce will be affected as security is increased at airports, public and private buildings and facilities such as oil refineries and production plants.
The costs of all that and the withdrawal of confidence and trust in the formerly smooth workings of the global economy will throw the world into a recession, economists predicted.
“The productive capacity of the economy has not been damaged. But the attack will hurt confidence, and economic growth will suffer,” Sung Won Sohn, chief economist of Wells Fargo & Co. said Tuesday.
“The U.S economy is going into recession, and the California economy is going into recession as well,” Sohn said.
Government spending on defense, budgeted at $301 billion for this year, will increase. Government outlays will surge for many other purposes as well, including rebuilding the devastated areas of New York and other crash sites.
“Our whole concept of security will now change. This means a shift of resources to defense of the homeland,” said Loren Thompson, managing director of the Lexington Institute, a defense policy firm in Arlington, Va.
Such spending could spur the national economy, but other factors will overwhelm any such stimulus, at least in the short term, economists say.
Walt Disney Co. and Universal Studios closed their theme parks in Southern California and Florida for the day Tuesday. They will reopen today to a darkened outlook for travel and tourism.
A decline in tourism will hurt the economy of Southern California as will the slowdown in international trade, which accounts for more jobs in this region’s economy than any other activity.
The effects of Tuesday’s devastation will be greater than that of the Gulf War period, which damaged the airline and tourism industries in particular and threw the U.S. economy into a nine-month recession.
The effect of insurance industry losses on the economy will be broad and long term. Insurance rates will rise for every business and risk. Insurance companies needing funds to honor claims will call upon the Federal Reserve to make sure funds are available.
The Fed will keep interest rates down and money plentiful to prevent financial panic.
Paradoxically, inflation may be a side effect of the coming recessionary period, as there will be a strain on supply lines for many goods and services.
The easy flow of materials in the global economy has always depended on an atmosphere of peace and security, experts pointed out Tuesday. That atmosphere, now shattered, won’t be restored quickly.
Flows of capital, which have financed the growth of the global economy and been of special benefit to the U.S. economy, also will slow in the absence of trust and security.
Prices of basic materials, particularly oil and gas, will rise for the immediate future, said Joseph Tovey, an investment banker in the energy industry. Tovey was on his way to a meeting Tuesday of the New York Society of Security Analysts at Tower 1 of the World Trade Center when the plane crashed into it. He phoned The Times from a pay phone on a Manhattan street.
Attempts to increase production of natural gas and other energy resources in the United States will be reinforced, Tovey said. The U.S. may not be able to greatly reduce its dependence on oil imports, which account for more than 50% of its petroleum energy. But efforts to take more imports from Mexico and other secure and allied countries will increase.
Projects to liquefy natural gas in Indonesia, Algeria and other countries, which have been under consideration by companies and financial markets, look much less likely to be constructed, Tovey said.
Defense experts were uncertain what new measures would be taken, beyond stepped-up security at military installations.
Expenditures are sure to rise for research and development of high-tech surveillance and intelligence systems, such as those produced by Northrop Grumman and TRW.
Some experts theorized that centralized installations such as the Pentagon itself would be replaced over time by decentralized military planning and management facilities.
“The Internet was developed to provide just such decentralized protection,” Thompson said. Yet Tuesday, Internet communication lines were not able to handle the flood of traffic.
Several defense experts predicted that President Bush now would encounter less opposition, in Congress and from foreign governments, to proposals for a U.S. missile defense shield.
Experts conceded that such a shield would not have prevented Tuesday’s attacks. But in their aftermath, all ideas for defense and security shields will get a receptive hearing.
Long term, the effects of Tuesday’s attacks can scarcely be calibrated. Much will depend on what level of confidence can be restored to the world economy by U.S. actions in the immediate future.
More than one U.S. senator compared the attacks Tuesday with Pearl Harbor, the 1941 attack that precipitated U.S. entry into World War II.
The terror bombings Tuesday may not remake the United States and the world as profoundly as World War II did, but they and the recession that now seems inevitable for the world, national and local economies will change our way of life.
