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Economic Impact of Terrorist Attacks Will Probably be Minor


Business forecasters at the University of California, Los Angeles (UCLA) say the economic impact of the last week's terrorist attacks will probably be minor. The economists say disruptions in air transit and a possible rise in oil prices pose a more serious threat to the U.S. economy.

UCLA economist Christopher Thornberg says the terrorist attacks had a major political impact, but little financial effect on U.S. business. He said, "They have changed the focus of our government. We went from looking internally to looking externally again. They've obviously had a huge human toll, the suffering and the loss suffered by so many people. But the economic impact is really negligible." Mr. Thornberg and his colleagues looked at natural disasters that caused damage comparable to the damage in New York.

Economist Edward Leamer says the economic impact of those natural disasters was limited. "For example," he said, "Hurricane Andrew did $40 billion worth of damage [in 1992] to the state of Florida. That affected earnings in the quarter in which it occurred, but by the next quarter, the state of Florida was fully recovered in terms of their earnings and gross state product."

Another natural disaster, California's Northridge earthquake, caused $23 billion damage in 1994; but the economist says California also recovered in just one quarter.

The devastation in New York and Washington was not caused by acts of nature. The damage was the result of terrorist attacks, and U.S. officials have called them acts of war. With the nation preparing for war, some economists worry U.S. consumer confidence could be shaken.

Economist Edward Leamer believes consumers are not that fragile. Moreover, he insists that recessions are not caused by fluctuations in consumer confidence but by cutbacks in business investment in the wake of declining profits.

He notes the United States is in an economic downturn based on the recent decline of the high-tech sector. He says the downturn was expected and should only last two quarters.

But he warns that excessive restrictions on air transport would have a long-lasting effect on the U.S. economy. Mr. Leamer said, "We cannot let the systems for delivering parts fundamentally affect our supply chains and cause idled work because we can't get parts to the right places, and we can't interrupt business travel."

The UCLA economists say possible disruptions in the oil supply could also cause a prolonged recession. The forecasters say higher oil prices combined with restrictions on air transit would raise the cost of doing business and could lead to a serious downturn in the U.S. economy. But they say the damage done in last week's terrorist attacks is not in itself enough to cause a recession.

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