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Economic Impact of US Attacks Unclear - 2001-09-18

The after effects of last week's terrorist attack are rippling through the U.S. economy, pushing down stock prices and causing precipitous drops in consumer spending and business activity. Hardest hit is the U.S. airline industry, which has cut flights and laid off thousands of workers.

U.S. Airlines had debt problems even before the crisis halted all flights and instilled the public with a great fear of flying. Now the industry says it will need $24 billion in federal assistance in order to avoid bankruptcy.

Brookings Insitution economist Bob Litan expects Congress to provide debt relief, but he also expects the airline industry's financial woes to spread to the entire travel industry. "That includes hotels, restaurants, the entertainment industry. People are not going to be enthusiastic about seeing movies," he said. "The leisure industry, the people that cater to travelers, the resort industry may see a hit on their earnings. I think we're just about to see the outward ripple effects."

How serious those effects will be, University of Florida finance professor Joel Houston says, rests with the U.S. consumer, whose spending accounts for most of the nation's economic growth. "How are they going to respond? To what extent are consumers confident about what's happening? Is this the end of the problem, or are they worried about future events? Their attitudes go a long way toward affecting how a lot of the sectors of the economy are going to perform," he said.

That goes for investment as well as spending, Joel Houston says. In an environment of massive uncertainty, people are reluctant to put capital into new businesses, reticent about taking the kind of risks that generate growth.

The question is, how long will today's uncertainty last? Economist Bob Litan says there are reasons to believe it could be short-lived. "There is some good news on the horizon, and that is that the government is going to be spending a lot more money on the military and on security, so there are going to be sectors of the economy that are going to get additional business," he said. "Thank goodness we had a budget surplus going into this, because we are now going to spend it. We're going to be stimulating our own economy."

Hopefully, Mr. Litan says, that stimulus will arrive in time to restore consumer confidence, break the downward fall and bring the economy back to recovery.