State economy will suffer from attacks, economists say

By Gary Gentile AP Business Writer
Thursday September 13, 2001

LOS ANGELES — The terrorist attacks that brought down the World Trade Center could hurt the already fragile state and national economy by dampening consumer confidence and business travel, top economists said Wednesday. 

But it remained unclear whether the attacks would drag California and the nation into a full-blown recession. 

“The human loss is catastrophic. The economic impact is harder to assess,” said Tom Lieser, senior economist of the Anderson Forecast at the University of California, Los Angeles — a leading economic barometer. 

Lieser and Edward Leamer, who were presenting the quarterly forecast at a UCLA conference, said the state and nation are already in the beginning stages of a recession and that Tuesday’s attacks could hurt the state’s strong tourism industry, which has helped the state weather the current downturn, they said. 

Economists say they will be watching consumers in the coming months to see if they resume spending or pull back and deal a crippling blow to the economy. 

“So much hinged on consumer confidence and what you have today is an unknown villain and a very high level of uncertainty and I think most people are going to put away their wallets for a while,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. “The state is on a knife’s edge. It depends on what consumers do.” 

Foreign investment in the United States could also suffer if the dollar becomes weak and investors seek safer havens, Anderson economists said. 

“A lot of our expansion in recent years has been funded by the investments of foreigners who have willingly held our dollar-denominated securities when they might have gotten a better return elsewhere,” Lieser said. “It was an intangible perception that the dollar was the safest place to park your money. There are fewer guarantees going forward that that will stay the case.” 

Lieser and Leamer join other prominent economists who worry that the attack could cause a ripple through the economy as foreign tourists stay home, hurting amusement parks, car rental agencies and hotels. State residents could also stop spending and the state’s technology companies, already reeling from declining stock values, could be further hurt if investors flee for safer investments. 

“If this was the event that tipped global investors back toward Europe or emerging markets and it does this rapidly, we could have a rapid depreciation of the dollar and the Federal Reserve would be caught between a rock and a hard place, wanting to raise interest rates to defend the dollar, which could cause inflation,” Leamer said Tuesday. 

In the Anderson Report, which was released Wednesday and prepared before Tuesday’s attack, both Lieser and Leamer predicted a mild and brief recession for the state and nation. 

In his report on the state’s economy, Lieser said higher power costs would lead to reduced business investment and significantly reduced consumer spending. That, combined with a housing crisis throughout the state, will lead to a mild recession that should last no longer than early 2002, Lieser said.