Economy Bends, Outlook Uncertain

The Sept. 11 terrorist attacks delivered a devastating blow to the world’s largest economy, scaring travelers out of the skies while shaking consumer and investor confidence. Economists say the attacks could force an already struggling economy into recession, but most regard the terrorists’ blow as less than fatal.

There will be serious repercussions for airlines, insurers and other industries that will have a ripple effect throughout the economy. Plus, other industries will absorb new costs associated with beefed-up security measures. While the outlook is uncertain, economists say the economy will recover from the attacks, and anticipate economic growth will continue next year. For trucking, a depressed freight market will continue to slow, but it is also expected to show signs of improvement next year.

The extraordinary circumstances make predictions difficult, says Bob Costello, chief economist for the American Trucking Associations. “There are too many unknown factors yet,” Costello says. Among the uncertainties: “Is there going to be another attack? What kind of response will we have? What will be the response from the Middle East when a [military] campaign begins? When will people feel comfortable buying again? These are what economists call ‘exogenous variables,’ which means they are outside anything you can program into an econometric model. That makes it more difficult to predict what’s ahead.”

For truckers, that adds up to a very uncertain outlook. On the one hand, fuel prices are lower than last year, but freight volume has been shrinking over the same period. The attacks are expected to further depress freight volume, while the impact on fuel prices remains to be seen. (See accompanying graphic on freight volume.)

The immediate impact was dramatized by news footage of jets crashing into the World Trade Center and then of the twin towers collapsing into giant piles of rubble. With the death toll more than 5,000 and property damage in the billions of dollars, President Bush asked for and Congress approved a $40 billion package for relief efforts and military preparations.

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With concern about air travel security, the airline industry asked for and received help from Congress in the form of a $15 billion bailout package of cash and loan guarantees.

Airline and insurance stocks were particularly hammered following the attacks. Stocks regained some ground in the following weeks, with some analysts issuing “buy” recommendations to their customers.

“We have members involved in airfreight who are definitely being affected” by the suspension of air service in the days immediately following the attack, says Warren Hoemann, vice president of public affairs, California Trucking Association. “But they know how to move things by truck, so they will be OK. The temporary closing of the ports and the border also affects a lot of people in the industry,” he adds.

New security measures in response to the attacks and longer waits at border crossings and ports may also affect trucking. Hazmat haulers, in particular, will see increased inspections from federal and state officials, the Federal Motor Carrier Safety Administration says. Those measures will carry a cost, but will be less significant than the expected loss of freight, says ATA’s Costello.

Longer-term, consumer confidence and uncertainty over oil prices stack up as the critical components of the economic picture. Before Sept. 11, predictions called for slow to flat third-quarter economic growth, a possible decline in the fourth quarter and gradual improvement by the beginning of next year. Now, most economic observers say a recovery won’t arrive until later next year.

“I think the earliest we are going to see a recovery is the second quarter of next year,” Costello says. “Certainly, I think this is going to slow down the economy even more. It puts off any recovery until later than we thought.”

Peter Kretzmer, senior economist with Banc of America Securities in New York, agrees. In a brief released a few days following the attacks, Kretzmer notes the economy, which was sluggish to begin with, would be “negatively affected in the short run, with the gross domestic product growing fractionally, if at all, in the third quarter of 2001 and declining in the fourth quarter.”

Consumer spending has propelled the economy in recent months, but that could change as consumer confidence stalls. “Before, it was the consumer kind of holding us together,” Costello says, “but if consumer spending starts to slip because of a loss of confidence, what I call a ‘bunker mentality,’ then the retail sector is going to be hit pretty hard too. It’s a given [trucking] is going to feel it.”

“It has affected the economy all the way down,” says trucker Bill Maloney of Rye, N.Y. “I live about 20 miles outside of New York City, and the whole immediate area has been affected, especially the hazmat hauling.”

According to the Banc of America Securities brief, the attacks will likely “affect consumer spending sufficiently in the short run to designate conditions as recessionary.” Unemployment is expected to rise to 5.5 percent by the end of the year to go along with negative GDP numbers. Once growth begins to resume next year, Banc of America Securities expects a “sharper and perhaps more traditional rebound than had been forecast previously,” because banking and capital markets are still strong and the “underlying structure of the economy” remains sound. Kretzmer also points to aggressive moves by the Federal Reserve Board to cut interest rates, recent tax cuts enacted by Congress and the relative strength of the banking system and capital markets. Plus, fuel costs remain lower than last year, although disruptions in the oil supply remain a key concern.

Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, says his group didn’t think trucking activity had “slowed significantly” following the attack. “We don’t anticipate things getting much slower,” Spencer says, “if you look at interest rates and other things. I’m holding my breath that fuel prices stay manageable.”

Immediately following the Sept. 11 attacks, diesel fuel at some truckstops rose as much as 30 cents in one day despite plentiful supplies. The national average price for diesel was $1.492 Sept. 10; it rose to $1.527 on Sept. 17 and dropped to $1.473 on Sept. 24, according to the Department of Energy’s Energy Information Administration. In an Oil Market Assessment published Sept. 12, the EIA says world oil supplies were “minimally impacted” by the terrorist attacks.

The EIA says oil markets are expected to continue “tightening” with crude prices “several dollars lower than” the high prices last year. But it notes that an event such as “increased Mideast tensions” could drive oil prices upward.

American consumers remain the drivers of the economy – accounting for as much as two-thirds of GDP growth. For that reason, consumer confidence has become a key measure of the economy. Surveys show consumers were becoming increasingly leery of the economy before the attacks, and more so afterward. Still, the surveys show some positive signs.

For truckers, hauling what consumers buy keeps the wheels rolling. But the consumer confidence measures are not directly applicable to trucking. “But consumer confidence is going to influence how much people buy, and how much people buy is going to influence what retailers see and what manufacturers see, and those are two key elements to the trucking industry,” Costello says.