13 September 2001, 11:31 FOCUS US consumer confidence seen falling, dragging economy into recession
---- by JUSTIN COLE ----
WASHINGTON (AFX) - US consumer confidence is likely to fall
significantly in the aftermath of the terrorist attacks against the
World Trade Center and the Pentagon, tipping the world's largest
economy into a recession and causing a further drag on slowing global
growth, economists said.
Economists expect the FOMC to trim its key federal funds rate
before its next scheduled policy meeting on Oct 2, in a bid to calm the
country's financial markets following cash interventions by the
European Central Bank and the Bank of Japan earlier today.
"We're operating in a sea of uncertainty, uncertainty is the enemy
of decision making. You could see some hold-up in peoples' spending
plans until we get a clearer picture of what is going to emerge," said
Robert Dederick, an economic consultant with Northern Trust Co in
Chicago.
"We've been counting on the consumer. The fears are to the
downside," Dederick said.
"Yesterday's horrific terrorist attacks on the United States will
inevitably have a deeply negative effect on the near-term pace of
global economic activity," said Sherry Cooper, a global economic
strategist with the Bank of Montreal Group of Companies, in a note to
clients.
Economists are now expecting the economy, which has weathered a
dramatic slowdown during the last 12-14 months, to fall into recession
as consumers put their spending plans on hold in a period of economic
and commercial uncertainty.
"The US economy will likely end up in recession, and the global
economy perform worse than in the early 1990s slowdown," Lehman
Brothers global chief economist John Llewellyn told clients in a
briefing note.
Economists are particularly concerned about the impact yesterday's
terrorist attacks will have on consumer confidence and sentiment
because consumer spending, which accounts for roughly two-thirds of GDP
growth, has been one of the few areas of the economy which has held up
well.
The full impact on consumer spending will become clearer through
the remainder of September and into the fourth quarter -- a period in
which economists had been forecasting that the economy would return to
growth.
"The mere disruption of New York, (which is closed to access south
of 14th Street today) Washington and all American airports will
contribute to this recession. Global trade will slow further,
exacerbating the multinational slowdown that is already in train. This
will mean global recession," Cooper said.
Before yesterday's terrorist attacks, some economists had
concluded that the Fed had completed its easing cycle -- after seven
straight rate cuts since Jan 3 -- but other observers were still
expecting the Fed to trim the fed funds rate by a further 25 basis
points before year-end.
As a result of yesterday's devastation, economists now expect the
FOMC to announce an inter-meeting reduction in the fed funds rate of
between 25 and 50 basis points.
The FOMC has cut the fed funds to 3.5 pct at its last meeting on
Aug 21.
Asked how the Fed is likely to react, Dederick replied: "This could
well rush them...they might well move more promptly now. Their primary
aim will be working to ensure there will be enough liquidity."
A Fed spokesman said today that the central bank's discount window,
which provides credit to the country's banks, remains open today and
that the window functioned smoothly yesterday despite elevated demand.
"Further monetary policy easing now looks increasingly likely,
though not necessarily immediately," said Llewellyn.
Despite expectations of an expected drop in consumer spending, some
economists noted that the economy bounced back from the 1991 Gulf War,
and Llewellyn added that "government expenditure will doubtless
increase, as further fiscal easing is now likely to be pushed through,
but it will take time to turn into actual spending."
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