Terrorist attacks further batter faltering economy but whether effects will linger still unclear

0

Rod Hagenbuch, a principal at a Los Angeles private investment and consulting firm, has told his wife to tell the interior decorator, “I will see her in a few years.”

Michael Meyer, a downtown real estate attorney, said he would “pause” before making any new significant investment.

Greg Henak, an engineer for a communications and computer cabling businesses, has a spending plan to pay down the credit cards.

As the United States hurtles toward a military showdown with those suspected of carrying out this month’s terrorist attacks, concerns about the U.S. economy are reaching the breaking point.

Last week, there were reports of a sharp decline in retail sales as Americans seemed to respond to their fears in a traditional way, by keeping their hands on their pocket books.

Take the Circuit City story in Industry, one of the chain’s leading West Coast revenue producers over the last several years. Assistant manager Andy Chang estimated that foot traffic has been off by half since Sept. 11.

“Let’s put it this way,” said Chang, late last week. “It’s 10:30 a.m. right now, and there are no customers in the store.”

Even Lisa’s Tea Treasures, a small tea, lunch and gift shop in the Glendale Galleria, saw a sharp decline in traffic. And those that were buying, weren’t nearly spending as much.

“We have tea pots that cost $100 to $200. People are keeping their purchases to $10 and $20,” said store manager Jessica Bedrico.

Economists and consumer psychologists say that while such reports are telling, it’s too early to draw broad, long-range conclusions.

Richard Curtin, director of the University of Michigan’s Consumer Sentiment Index, says that consumers remain in a state of shock over the unprecedented terrorist attack.

“People are not really acting like normal consumers right now,” said Richard Curtin, director of University of Michigan’s Consumer Sentiment Index. “The more important reaction is the one they will take some weeks from now when they are at the kitchen table wondering how they need to adjust their spending.”


Initial Indications Mixed

So far, the national psyche has been all over the map.

The commercial airlines and Boeing announced tens of thousands of layoffs last week. The stock market hit depths it has not seen in three years. But there also were reports that car and home sales are holding up better than expected.

All this has added up to uncertainty for accountant James Peters.

“I am paying attention to spending more, watching it, thinking about it,” said Peters, 55, who has two children in college. “But if the market stays at its low rates, any cash you might have might have a pretty good place to rest.”

For others, especially low-wage workers raising families who live paycheck to paycheck, the question is more basic. “We are going to spend the way we always spend,” said Arcadio Sanchez, who works at a lunch shop in Los Angeles. “We spend our money where we really need it.”

David Stewart, a consumer psychologist and professor of marketing at the University of Southern California, said consumers would have to brace themselves for a likely stream of bad news before any turning of the corner.

“Those tend to have a cumulative effect,” he said. “Each one suggests you are not as well off as you thought. It has a worse effect than if all the bad news happened in one day.”

History could provide a clue. After Iraq invaded Kuwait in 1990, an already declining consumer confidence index fell 35 percent in less than a year. It rose sharply after the quick allied victory in the Persian Gulf War, but the country remained mired in a recession.

“We know if we have solid economic foundations consumers tend to weather shocks well, but this is an unprecedented shock and the economic fundamentals aren’t that strong,” said Lynn Franco, director of the consumer research center at The Conference Board.


Earlier fallout

How consumers react in the coming weeks will not just being determined by events following Sept. 11. All summer, there has been a tide of mostly bad economic news.

The tech slide had picked up steam again, retail sales were down and the jobless rate had risen from 4.5 percent to 4.9 percent in the biggest one-month rise since before the tech boom.

The Conference Board’s widely watched Consumer Confidence index had been falling since last year. It rose in May and June, only to fall in August to 114.3, its lowest level since 1996.

Meyer, the real estate attorney, said he has seen colleagues try to convince themselves and others that the economy is really doing OK. He isn’t buying it.

“There are a lot of people who are in denial about how bad the economy is,” said Meyer, a father of four school-age children.

Moreover, there is evidence that consumers are using their tax rebates to pay off record levels of debt, not spend as the Bush Administration wanted them too.

That, in essence, was Henak’s plan after indulging in a series of high-ticket purchases over the last two years afforded by two incomes and handsome bonuses. His decision has only been reinforced by the terrorist attacks.

“I still feel that paying off the bills is the way to go,” said Henak, 36, a father of four whose personal revolving credit debt tops $10,000. “I don’t feel I deserve anything right now.”


Keep the economy humming

Federal Reserve Chairman Alan Greenspan maintains that the economy is far more resilient than people think, despite the massive losses in stock market equity that has caused many to rethink retirement plans. And Administration officials contend that there may be no better elixir for the current uncertainty than strong military action.

Moreover, Bush Administration officials are talking about an economic “emergency” and a new stimulus package of perhaps $180 billion.

Also, money is cheap courtesy of the Fed’s rate cuts, boosting home sales that have so far have remained strong. Still, the sheer size of the bailout belies the Administration’s true sense of urgency that a switch to Keynesian tactics is apparently in order.

The idea is to keep the economy humming even as the bombs may be bursting over Kabul. But for now, the only sure thing is the uncertainty of it all. And when all is uncertain, said Richard Giss, a partner in the Deloitte & Touche’s retail service group, expect consumers to remain cautious.

“They want to save their money to have their maximum options available to them,” he said. “It’s like a squirrel saving acorns for winter.”

No posts to display