Sales Drop and Spending Crawls as Uncertainty Grips Economy
THE ECONOMY
September 30, 2001
From The New York Times
By LOUIS UCHITELLE
In the wake of the Sept. 11 terrorist
attacks, sales are falling in nearly every
sector of the economy — from autos and
home building to high technology and
department stores — as gloom spreads
beyond the airline and travel industries.
As a result, executives in one industry after
another are postponing whatever spending
they can until the uncertainty lifts and they
have a clearer idea of how consumers are
reacting to the crisis. "People are saying
things like, `We have hit the wall and the
fourth quarter will be very bad,' " said Jerry
Jasinowski, president of the National
Association of Manufacturers, describing
conversations with chief executives of
companies in his organization.
The damage is considerable. An economy
that was struggling before Sept. 11 has sunk rapidly in the nearly three
weeks since the terrorists destroyed the World Trade Center and damaged
the Pentagon. Hardly anyone predicts that economic activity increased in the
third quarter, which ends today. The attacks guarantee contraction,
forecasters say, leading to an outright recession if the downturn continues
through Christmas.
The immediate economic harm from the attacks was stark, but limited.
Airlines shut down, and air traffic is still way off. Industries directly linked to
airline travel — hotels, rental cars, aircraft manufacturing, theme parks,
airport restaurants — also suffered. Still, the airlines and their satellites
represent less than 4 percent of the nation's $10 trillion economy, according
to the Commerce Department's Bureau of Economic Analysis — hardly
enough to sink the economy alone, short of shutting down almost entirely.
The operations of the brokerage firms and investment houses in the World
Trade Center were barely visible in the national accounts.
But beyond the immediate damage, the terrorism and the reaction to it —
particularly the psychological damage — appear to be rippling through most
of the economy, unchecked so far.
"The problems we have now have the potential to become much bigger,"
said Peter Temin, an economist at the Massachusetts Institute of Technology.
"It is the role of government to make sure they don't. Maybe the economy
can save itself and maybe it cannot, but it does not look good right at the
moment."
The troubles are big and small. Disney and Warner Brothers delayed the
release of two expensive films because they dealt with terrorism and a bomb
smuggled aboard an airplane. EMC (news/quote), the nation's leading
vendor of data storage equipment, announced the layoff of 2,000 employees,
10 percent of its work force, because of a "blanket of hesitation" among its
customers, said Joseph M. Tucci, the chief executive.
In Jacksonville, Ark., the Hiwasse Manufacturing Company, which makes
control panels for stoves and other kitchen appliances, had to slow
production because a technician was afraid to fly to Arkansas from Chicago
to repair a balky machine. "We found a way to work around the problem,
but at greater cost to ourselves," said J. Richard Derickson, chief executive
of Hiwasse.
Consumer confidence, the chief gauge for determining how willing people are
to spend, has twisted up and then down in the nearly three weeks since the
attacks. The consumer confidence index produced by the University of
Michigan rose initially, but plunged in the second week, the university said on
Friday.
"The public's first reaction was to reassert confidence that the terrorists were
not going to win," Richard T. Curtin, director of the surveys, said in
summarizing the results of the 500 phone interviews on which the index is
based. "And then in the second week, the reaction set in."
Confidence fell more sharply than at any time since the oil embargo in 1973
and the Iraqi invasion of Kuwait in 1990. It might revive in October absent
another terrorist attack or a military operation that heightens the fear of
further retaliation, Mr. Curtin said. "Right now," he said, "people tell us they
are unsure about their own personal safety, they are concerned about
casualties in a military action abroad, and they have decided that this is the
moment to be cautious spenders — particularly for major items like homes,
autos, appliances, furniture, computers."
The fearfulness was reflected in spending patterns last week. Sales fell at
Saks Inc. (news/quote), the Gap, Limited, the Gucci Group (news/quote)
and other stores whose upscale merchandise is less than essential, said
Richard Baum, a retail analyst at Credit Suisse First Boston (news/quote). At
the same time, sales rose for basics — toothpaste, packaged food, shoes,
toilet paper, diapers — at Wal- Mart, Kmart and other discount stores.
Data gathered from supermarket scanners showed big declines in sales of
facial cosmetics and nail polish but a sharp increase in spending on candles.
The question in Mr. Curtin's mind is how long the fearfulness and shock will
last. That is also the concern of Andrew Kohut, director of the Pew
Research Center, who found in a poll of 1,000 people that 70 percent said
they were depressed, 50 percent said they could not focus on their jobs and
33 percent said they were having trouble sleeping.
"People are down, and the question is when they will come back," Mr.
Kohut said, noting that in previous crises the bounce-back came relatively
soon.
Still, companies are sometimes damaged in ways that do not necessarily hurt
the economy. Insurance companies, suffering their biggest single loss ever,
are paying out more than $40 billion, but those filing the claims and receiving
the money will presumably reinvest it in the economy, particularly to rebuild
Lower Manhattan.
Merrill Lynch (news/quote) and Lehman Brothers (news/quote), with offices
in the World Trade Center, have been forced to operate at less than full
strength since Sept. 11. But their customers are still trading, and brokerage
fees that Merrill and Lehman once collected are now going to Credit Suisse
First Boston and other firms.
Many restaurants nationwide report fewer patrons, but fast-food chains say
business is up — not inside the restaurants themselves, but at the take-out
windows, perhaps reflecting a reluctance to linger in public places.
Among other businesses that have gained, pharmaceutical companies report
that sales have risen for sleeping pills and antidepressants. One
antidepressant, Zoloft from Pfizer (news/quote), has been specifically
approved to treat post-traumatic stress disorder.
The nation's automakers are uniformly suffering. With sales falling, Ford
Motor (news/quote), General Motors (news/quote) and DaimlerChrysler
(news/quote) have curtailed production and offered zero-interest financing to
draw buyers, a tactic that cuts into profits.
As in many other industries, the savings from strategies that are meant to
minimize the expense of keeping inventories have been diluted. Toyota
(news/quote), for example, had maintained enough Canadian parts for only
one day's production at its three United States assembly plants. Because of
unpredictable border delays, that has been doubled to two days' inventory.
For every tractor-trailer that used to make the border crossing, a second is
now bringing a parallel shipment, in case one is delayed at the border. "All
this adds to cost," said Dennis C. Cuneo, a senior vice president at Toyota.
"And there has been another cost. I don't know how you calculate it, but a
lot of management's time has been focused in the last three weeks on
keeping our plants running."
Apart from the pullback in consumer spending, nothing is more damaging to
the economy than the freeze that many executives say has descended on
investment in new equipment, computers, software and other tools of
production. Spending on information technology in particular has suffered,
according to surveys of Fortune 1000 companies by Howard Rubin at the
META Group (news/quote).
Eight days after the terrorist attacks, 87 percent of the companies said it was
too soon to decide whether to cut their investment spending. But by last
Wednesday, 53 percent said they would cut their spending, in some cases by
as much as 15 to 20 percent.
Home construction had remained strong in a weakening economy, but
builders say that in the wake of the attacks, declining home sales have forced
them to pull back. Sales are likely to be off by as much as 6 percent by the
end of the year, despite 30-year mortgage rates that have dropped below 7
percent, the National Association of Realtors said.
That prediction jibes with the experience of Lee Baum, a home builder in
Memphis. When the terrorists struck, his company, Baum & Company, had
18 houses in the $200,000-to-$350,000 range under construction. Only
three had buyers, while the other 15 were going up in the previously reliable
expectation that they would be sold before their completion.
Now, 3 of the 15 are nearly finished but still for sale. "Normally we don't
come to completion without having sold a house," Mr. Baum said. Like many
other builders, he has decided to pull back on speculative building, or starting
new homes before buyers are found, which represents one-third of the
single-family home construction in the United States.
The economic damage since Sept. 11 seems to touch dozens of industries.
Movie attendance is down, apparently out of a fear of terrorism in public
places, and the recording of new music is likely to suffer, says Richard D.
Parsons, co-chief operating officer of AOL Time Warner (news/quote).
"In things like the record business," he said, "where people just don't want to
travel anymore, things will slow down on the production side because just
getting the artists there to record or release or promote is difficult."
The airlines are the hardest hit, laying off 100,000 workers already and still
not able to cut costs enough, industry executives say, to offset their losses.
Passenger traffic last week averaged less than 50 percent of capacity, and
even with billions of dollars in emergency support from the federal
government, the airlines said they will lose money until the average rises
above 50 percent.
The reluctance to board a plane causes Mr. Kohut, the pollster, to wonder
when the economic damage from the terrorist attacks will begin to fade. "We
have to recognize that this is a mood in America unlike any we have ever
seen before," he said. "It could last, or people could snap out of it."
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