"Economists watch for terror plot impact"

Friday, August 11, 2006

Economists watch for terror plot impact
By JEANNINE AVERSA
The Associated Press


WASHINGTON - Failure of the plot to blow up U.S.-bound planes saved the
weakening economy from a major jolt. Now economists are keeping close tabs
on consumers and businesses for lingering fears. 
  
People and companies already had been tightening their belts, pressed by
lofty energy prices, a loss of altitude in the once high-flying housing
market and the toll of two years of interest rate increases. All those
slowed the economy this spring.

If people were to become gripped by fresh worries about terrorism, they
might curb their spending even more, further weakening the economy.

At the moment, consumers and businesses alike appear to be taking the terror
plot news in stride.

Yet, the foiled plot is likely to come up over and over in debates among
politicians this election season - reminding voters of national security
concerns and vulnerabilities.

"It will have a megaphone effect and not its usual shelf life," predicted
Terry Connelly, dean of the Ageno School of Business at Golden Gate
University in San Francisco. The potential for such incessant "yackety-yak"
as Connelly calls it, could end up spooking consumers and businesses.

It's the behavior of businesses that Connelly is especially concerned about.

Economists have been counting on companies to spend and invest at a solid
pace through the rest of the year - helping to cushion the economy from the
negative effects of a slowdown in consumer spending.

In the April-to-June quarter, however, businesses cut spending on equipment
and software for the first time in three years.

"With uncertainties about the economy's direction, the outcome of the
elections, bloodshed in the Middle East, this - terrorism fears - can be
just one more reason to delay or hold back investment decisions," Connelly
said.

The terror plot could threaten the U.S. airline industry's fledgling
recovery, some analysts said.

The industry, which was dealt a terrible blow by the 2001 terror attacks on
New York and Washington, was beginning to see improvement. Airlines were
coming off a solid second quarter, in which some carriers posted profits for
the first time in years.

Worries about safety could bring cancellations. New restrictions for
carry-on luggage - banning liquids and gels such as shampoo, toothpaste and
water - could deter some from flying.

Airline stocks are taking a pummeling.

"If we had low energy prices, then I think the airlines might recover more.
But the combination of high fuel costs and the potential for weakness in
demand because some people are less willing to fly could set the airlines
sector back a bit," said Gary Thayer, chief economist at A.G. Edwards & Sons
Inc.

Economists, however, don't believe such a setback for the airline industry
would pose a danger to the country's economic health.

On Wall Street, the stock market has coped well with the revelation of a
terror plot.

"For better or worse, we've gotten more used to this," said Diane Swonk,
chief economist at Mesirow Financial. "The 9/11 attacks took away our
innocence, but it seems that any additional strike elsewhere or any
additional attempt, the shock has been less." 

The economy grew at a 2.5 percent pace in the April-to-June quarter - less
than half the rate of the prior three months. Economists expect growth to
stay subdued at a pace of 2.5 percent or 3 percent in the current quarter. 

Consumers' confidence in the economy dropped in early August for the second
month in a row, according to a measure by Ipsos, an international polling
firm. Connelly thinks the terror plot could put a further dent in consumers'
psyches - but that doesn't necessarily mean they'll trim spending. 

Shoppers regained their appetite to spend in July, propelling sales at the
nation's retailers 1.4 percent higher, the most in six months, the
government reported Friday. 

The 2001 terror attacks in the United States hurled a punch to the economy,
which had already tipped into a recession. That year, the economy grew by
just 0.8 percent, the smallest gain in a decade. 

If the recent plot hasn't been stopped and the terrorists had prevailed in
carrying out violent acts, the fallout to the economy could have been
severe. 

"It would have been debilitating. We are currently at a fragile point in the
business cycle. Another event would have had a big impact on people's and
companies' thinking. They would have begun to cocoon again," said Mark
Zandi, chief economist at Moody's Economy.com.

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