http://www.bloomberg.com/apps/news?pid=20601101 <http://www.bloomberg.com/apps/news?pid=20601101&sid=a.Btk74nUhdY&refer=japa n> &sid=a.Btk74nUhdY&refer=japan Terror Attacks Leave U.S. Economy More Vulnerable to New Shocks By Rich Miller and Matthew Benjamin Sept. 11 (Bloomberg) -- The terrorist strikes of Sept. 11, 2001, changed the U.S. economy in ways that no one expected five years ago. Instead of plunging the U.S. into a recession, as many economists predicted, the attacks helped set the stage for a consumer-powered recovery as the Federal Reserve slashed interest rates and the federal government increased spending and cut taxes in response. Since the tragedy, the economy has grown at an average annual rate of 3.1 percent, close to the pace set in the 1990s. The economy's resilience came with a half-trillion-dollar increase in government spending on homeland security and wars in Iraq and Afghanistan, a $4 trillion jump in household debt and a 50 percent increase in house prices. While these helped speed the recovery from the attacks, they may have left the economy more vulnerable should such a shock occur again. ``We've become more unbalanced and fundamentally more precarious as a result,'' says Stephen Roach, chief global economist at Morgan Stanley in New York. Back in 2001, the government ran a budget surplus of $128 billion. Now it's in deficit to the tune of $318 billion in the fiscal year ended Sept. 30, according to the Congressional Budget Office, thanks in part to spending on the war on terror and tax cuts to stimulate the economy. Consumer debt, including mortgages, credit cards and car loans, mushroomed in five years to $12.2 trillion from $7.9 trillion as Americans used the low interest rates engineered by the Fed to finance a spending spree. The median price of an existing home ballooned to $230,000 from $153,000 in September 2001. Oil Prices War in the Middle East following the Sept. 11 attacks helped push the price of a barrel of crude oil to $68 this month from $28 five years earlier. A gallon of regular gasoline averaged $2.73 last week, compared with $1.53 on Sept. 10, 2001, according to Energy Department figures. The combination of increased consumer and government debt, an inflated housing market and elevated energy prices means the U.S. may find it harder to weather another shock like Sept. 11. ``The U.S. economy is more fragile now,'' says Allen Sinai, president of consultant Decision Economics in New York. Not all economists agree, pointing out that in some ways, the economy is better off now. When the terrorists struck in 2001, the economy was already struggling, having grown at an annual rate of just 1.2 percent in the second quarter of the year. In the second quarter of this year, the economy grew at a 2.9 percent rate. ``Because the economy is still expanding, we are in a much less vulnerable position,'' says Anthony Chan, chief economist at JPMorgan Private Client Services in New York. Living With Threat And Americans, having already suffered one terrorist attack, may be better prepared to handle another without losing confidence. ``People get used to things and Americans have learned to live with the threat of terrorism,'' says Richard DeKaser, chief economist at National City Corp. in Cleveland. That wasn't the case in 2001. In the wake of the terror attack, economists threw out their predictions for growth in the fourth quarter and said the economy would shrink at a 1.3 percent annual pace during the period, according to the October 2001 Blue Chip survey of leading forecasters. Instead, the economy rebounded, growing at a 1.6 percent pace in the fourth quarter, aided by an easing of monetary policy under then-Fed Chairman Alan Greenspan. By the close of the year, the central bank had cut its benchmark rate in half, to 1.75 percent, and by 2003 had reduced the rate even further, to 1 percent, to help spur growth. Less Leeway The Fed may not be able to be as aggressive now. Powered by consumer demand and the rise in oil prices, inflation is running at a year-on-year rate of 4.1 percent now vs. 2.7 percent in August of 2001. That limits the leeway the central bank has to cut interest rates. Even if the Fed were to cut rates now, its easier monetary policy might not have as big an impact. ``A lot of the monetary stimulus the last time worked through asset prices,'' says Philip Swagel, an economist at the Washington-based American Enterprise Institute and a former White House and International Monetary Fund official. ``It's hard to imagine housing prices are going to take off again even if the Fed cut rates.'' The federal government's reaction after the terrorists struck also stimulated growth. Congress authorized $40 billion in emergency spending to pay for relief efforts and ended up accelerating tax cuts already on the books to aid the economy. Lawmakers have appropriated $430 billion to the war on terror and conflict in Iraq, the Government Accountability Office says. Room to React ``We had a lot of room to react in 2001 because the budget was in surplus,'' says Michael Mussa, a former IMF chief economist who's now with the Institute for International Economics in Washington. ``Now we don't have the room to engage in a major fiscal stimulus if the economy goes into recession.'' The economy's rebound from the Sept. 11 attacks also owed a lot to a surge in consumer spending. Egged on by appeals to patriotism by President George W. Bush and zero-percent financing from the auto companies, Americans went on a buying binge, confounding economists' forecasts that they would turn cautious. Now, though, they're deeper in debt and according to government statistics already spending more than they earn. ``Consumers are a bit tapped out, so they wouldn't be as aggressive as they were after 9/11,'' says Mark Zandi, chief economist at Moody's Economy.com. Auto companies too aren't in any position to roll out more generous incentives for buyers. General Motors Corp., the world's largest automaker, had its first unprofitable year in 13 years in 2005, losing $10.6 billion, and lost another $2.9 billion through June 30 of this year. Third-place Ford Motor Co. lost $1.4 billion in the first half of the year. Sept. 11 ``triggered a whole sequence of events, direct and indirect, that the economy will be suffering from for a long time,'' Sinai says. To contact the reporters on this story: Rich Miller in Washington at [EMAIL PROTECTED] Matthew Benjamin in Washington at [EMAIL PROTECTED]
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