Economic Impact of Terrorist Attacks on World Trade Center Will Be Minor, Say UCLA Economic Forecasters

Business Wire, Sept 14, 2001

Business Editors

LOS ANGELES--(BUSINESS WIRE)--Sept. 14, 2001

The terrorist attacks on the World Trade Center and the Pentagon have taken a horrific human toll but will have little impact on the national economy, which was already reeling from the burst of the technology bubble and headed toward a recession, according to economic forecasters at The Anderson School at UCLA.

In a report published today on the UCLA Anderson Forecast Web site (http://uclaforecast.com), economists Edward E. Leamer and Christopher Thornberg argue that history suggests that these terrorist attacks will have only brief and limited economic consequences for the United States overall. Historically, natural disasters with comparable damages have not pushed any of the U.S. states into recession, the forecasters said. Neither have previous declarations of war. Leamer is director of the UCLA Anderson Forecast and an economics professor at The Anderson School, and Thornberg is a senior economist with the Forecast.

While the sheer scope of the New York bombings far exceeds any previous terrorist attack, nature has provided many tests of economic resilience with calamities of this magnitude, according to the economists. These tests include the Northridge Earthquake, Hurricane Andrew and Hurricane Floyd. A full recovery of income levels after each of these catastrophes took only a single quarter.

Leamer and Thornberg further argue that the business cycle is not driven by a social-psychological malaise among consumers. Neither the University of Michigan nor the Conference Board's measures of consumer confidence help to predict an oncoming recession. "After all, for more than six months consumers have been expressing a lack of confidence to poll takers, but they are saying something else with their pocketbooks as they continue to buy cars and homes," the economists write.

It is widely reported in the press that the 1990-91 recession was induced by a drop in consumer confidence brought about by the Iraqi invasion of Kuwait and the subsequent Gulf War. Not so, argue these economists. They contend that the recession was caused by a spike in crude oil prices and uncertainty about supplies from the Middle East. Together these factors produced the appropriate rational reaction -- postponement of business investment and consumer durable purchases, until the uncertainty could be relieved.

Leamer and Thornberg maintain that the current recession resulted from "very disappointing profits that have come from the extraordinarily high level of IT investments made during the Internet Rush from 1996 to 2000." As indicated in their September quarterly forecast, released Wednesday, they say "slow or negative growth will be with us until businesses can figure out how to squeeze reasonable levels of profits from IT investments, or until the excess IT capacity is eliminated by depreciation and technological obsolescence."

Finally, Leamer and Thornberg caution that a sharp but uncertain increase in the cost of doing business, such as a doubling of crude oil prices, can cause a recession. Since business travel is essential to making and closing deals, "we need to ensure that new airport security measures do not cause the same economic costs as the doubling of crude oil prices."

To view the complete report, please visit http://uclaforecast.com

The UCLA Anderson Forecast celebrates 50 years of accuracy for its predictions on both the California and national economies. Lead by renowned UCLA Anderson economist Edward Leamer, the Forecast is the most widely followed and often-cited forecast for the state of California, and was unique in predicting both the seriousness of the early-1990s downturn in California and Southern California, and the strength of the state economy's rebound since 1993.