The US Economy after September 11th. Decline or Rapid Growth? ( 11- . ?)

       The US Economy after September 11th.  Decline or Rapid Growth?



                                                   Katya Banina, group #110.
    On a common Tuesday, September 11th music on my favourite radio station
was interrupted by a special news block, which  reported  that  an  airplane
tore into the one of the twin-towers of the World Trade Centre in New  York.
My first thought was about dramatic weather conditions that could  have  led
to such a terrible accident. I couldnt even  imagine  that  it  might  have
been a terror act or something like that.  In  some  minutes  together  with
millions of  people  all  over  the  world  I  was  watching  views  of  the
catastrophe on TV and couldnt believe my eyes.  If  I  hadnt  heard  about
this before, I would have definitely thought that a new Hollywood movie  was
on. The understanding and feeling of what had happened and of the  scale  of
this came only after some hours of embarrassment and shock
    But business and economic spheres cant afford hesitation and delay. On
this day ruined not only the walls of the  World  Trade  Centre,  but  also,
which is much more important for the economy,  the  assumption  of  the  USA
being a standard of stability, trust and prosperity. Businessmen,  investors
and brokers recognised that the faster they reacted, the more  they  benefit
(or probably the less they lose)  in  the  situation.  Market  response  was
immediate. Words  of  Alan  Greenspan,  chairman  of  the  Federal  Reserve,
illustrate  it:  Greater  uncertainty  for  business  and  consumers   hits
economic activity, at least in the short term.
    Already since the beginning of  the  year  2001  economists  have  been
arguing about whether the economy of the  United  States  was  declining  or
not. The situation, indeed, was not very obvious  because  of  a  number  of
attempts of the Federal Reserve to stimulate the expansion  by  cutting  the
interest rate. Today, however, practically all of the specialists  say  that
the American economy is in recession. Now there is no  common  view  on  how
long and how deep the recession will be and how to evoke  the  recovery.  To
illustrate this I want to note that one group  of  economists  believe  that
cause of this recession is  not  terrorism,  but  rather  the  economic  and
financial imbalances that built up during the  late  1990s,  and  that  the
incident  of  the  September  11th  was  only  a  jolt  to  aggravating  the
situation. Firms overinvested and overborrowed due to inflated  expectations
about future profits. Households borrowed heavily too, believing that  share
prices would rise forever. Thus, it will take  time  to  bring  consumption,
investment and loans to their natural rates. Despite this, there is  also  a
point of view that the  events  of  September  11th  have  made  a  V-shaped
recession  and  recovery  more  likely:  a  swift  slide  down  one   slope,
sufficient to propel the economy up  the  next.  Now  it  is  high  time  to
consider facts, mainly statistical, which are  important  in  the  analysis.
Its better, to my mind, to begin with the pessimistic prognosis.
    Economic data published since September 11th  have,  not  surprisingly,
been gloomy. America's industrial production fell in September by  1%.  That
was its 12th successive month of decline, the longest  unbroken  fall  since
1945. The current manufacturing activity had plunged  to  its  lowest  level
since February 1991. The 5.8% output loss of the past 12 months  is  already
greater than in  the  recession  of  1990-91.  Retail  sales  also  fell  in
September, by 2.4%, consumers cut back their spending in  September  by  the
largest  amount  in  nearly  15  years.  To   cope   with   sagging   sales,
manufacturers have  sharply  cut  back  production  and  shed  workers.  The
nation's unemployment  rate  leaped  from  4.9%  in  September  to  5.4%  in
October, the biggest one-month jump in more  than  21  years.  This  is  the
highest unemployment rate since December 1996. 415,000 jobs were  eliminated
during the month, which represented the biggest cut in  payrolls  since  May
1980. Manufacturing,  airlines,  travel  agencies,  hotels,  retailers  were
among those suffering big losses. ''Companies are in survival mode and  they
are  cutting  jobs  to  control  costs,''  said  economist  Ken  Mayland  of
ClearView Economics.  ''The  tragic  events  of  September  11th  and  their
aftermath probably tipped the economy into  recession.  People  are  waiting
for the other shoe to drop.'' There is one more  indirect  evidence  of  the
tough state of  staff  policy  in  American  companies:  many  of  them  are
planning  to  cancel  traditional  Christmas  Parties  due  to  their   poor
financial condition.
    Thus, according to the  GDP  report  of  the  government,  the  economy
contracted in the third quarter.
Even with a mild recession in America, then, this could still turn out to
be the most severe world recession since the 1930s. (Such a recession is
commonly defined as annual growth of less than 2%.) Global growth is
predicted to be average 1.5% in 2001 and 2002, its slowest two-year period
during the past 50 years. This increases the risks for America, because
contracting trade can amplify a recession. Last year the volume of world
trade grew by 13%, this year growth may fall to zero. When nominal GDP
growth falls so low, central banks have less scope to use monetary policy
to boost demand, profits grow more slowly than expected by stockmarket
investors, borrowers find it harder to repay debts.
    There is also one factor, which some specialists  consider  to  be  one
more evidence of weakening economy: profits of confectionery companies  grew
this year by 15%. Statistics  say  that  this  is  often  an  indication  of
recession, as many people cant satisfy their luxury  wants  any  more,  but
consuming larger amounts of sweets, which are comparatively cheaper.
    In addition with the wide-spread view that the country has entered  its
first  recession  in  a  decade,  analysts  are  predicting  that  inflation
pressures, which have been moderating for  a  year,  will  retreat  further,
especially in the area of wage pressures, as the surging  unemployment  rate
dampens workers' demands for salary increases.
    Economists are afraid of  that  continued  fallout  from  the  attacks,
worries about anthrax in the mail, tumbling consumer confidence  and  rising
unemployment,  will  keep  consumers  tightfisting,  further  weakening  the
economy.
    But let us now  switch  to  the  more  optimistic  prediction  as  many
economists still reckon that America's recession will  be  brief  and  mild.
They predict that GDP of the USA will decline till  the  second  quarter  of
the year 2002, then will start to recover with quite a strong growth, by  3-
4%. If the prognosis turns out to be right, it will be one of  the  shortest
and mildest recessions on record.  And  there  are  three  main  reasons  to
believe in it:
1. It is argued that firms have already made  steps  to  cut  back  unwanted
   inventories and overcapacity.
2. In contrast with three previous recessions, oil price has fallen.
3. America benefits much from monetary and  fiscal  policy.  Interest  rates
   have been cut ten times  this  year,  including  three  reductions  after
   September 11th, to their lowest level since the early  1960s.  President
   Bush, meanwhile, wants Congress  to  quickly  pass  a  package  aimed  at
   stimulating the  economy  through  new  tax  cuts,  increased  government
   spending, emergency relief, which could amount to 1.5% GDP  the  biggest
   fiscal boost in one year since 1975.
Indeed, the US economy had an advance in October, largely thanks to zero
interest-rate financing for new cars. The value of retail sales climbed by
7.1%, the biggest increase ever. Sadly, retail sales dropped back next
month, as the effects of the incentives ran out. But even not taking into
account cars, retails sales rose by 1% in October.
Besides also in October the US dollar reached a 3-month high against the
Euro due to new hopes for a revival of consumer demand.
    The hope that America's recession will be mild appears to  have  helped
share prices to recover worldwide. Many stockmarkets  have  almost  regained
their levels on September 10th. Main indexes - Nasdaq, S&P 500, DJIA  -  are
edging  up,  though  in  comparison  with  December  31st,  2000  they   are
respectively 23%, 13.6% and 8.9% lower. Considering  Commodity  Price  index
change on October and on  the  whole  year  we  face  practically  the  same
situation: change of Industrials index on one year  is  -15.7%  and  on  one
month +2.7%, change of Food index -2.7% and  +3.0%  respectively.  The  same
applies to other commodities as well as for all items.
This might signify that gradual boosting of the Economy in the last quarter
of this year and in 2002 will compensate for the sharp slump in September
and the recession will be left behind.
    As for me I believe in the USA. There is one common feature of  Russian
and American folks I can distinguish and admire, it  is  that  in  the  most
dramatic moments each nation unites and in spite of all obstacles,  troubles
and difficulties overcomes the crisis. This has  been  proved  not  once  in
course of  history  of  both  countries  (not  without  any  exceptions,  of
course).
    There are many reasons for a sharp decline in the US economy, but  some
factors that could amplify its recovery and further growth also exist.  Both
for and against were  presented  above  and  at  the  first  glance  the
pessimistic anticipation seems to predominate.  But  still  I  cant  forget
about this nation spirit  an unexplainable component, i.e. the  so-called
X-factor of success in the most unfavourable conditions.  Although,  by  the
way, I may think so under the influence of the American  standard  of  well-
being. But still taking  into  consideration  this  as  well  as  all  other
optimistic forecasts, I am inclined to believe that the recession  will  not
last for a long time and may,  on  the  contrary,  stimulate  the  following
rapid pace growth.

List of resources used in preparing the report:
www.economist.com
www.usatoday.com
www.reuters.com
The Economist, November 17th, 2001.




	

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