Economic Analysis: Financial Uncertainty, Recession Fears Loom

As the nation struggles to comprehend the horror of the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon, it faces an even more uncertain economy.

The financial, political, military and national security concerns that were brought about by the attacks virtually shatter any hope of a sustained economic recovery before the second half of next year and squeeze the already battered technology sector.

In the wake of the tragedy, consumers are likely to curtail their spending, which in turn will deepen cutbacks in business production, employment and capital spending already in effect because of the slow economy. Such circumstances augur negative economic growth for at least the rest of this year.

The last time the nation faced similar conditions was the 1991 Persian Gulf War. During that conflict and its aftermath, consumers and businesses froze spending, pushing the economy into a recession. Last week's attacks,which occurred on American soil and will produce many more casualties than the Gulf War,will very likely do the same.

"[The attacks are] going to have major impact on the whole economy," said Bob Huang, chairman and CEO of Synnex Information Technologies, Fremont, Calif. "Remember, Desert Storm in 1991 had a huge impact on the stock market. You can almost imagine the impact this will have."

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{C}A full-fledged recession would be another blow to technology solution providers and vendors. Solution providers already had subdued sales-growth expectations for the rest of this year, according to the CRN Monthly Solution Provider Survey. Moreover, in CRN's August poll of enterprise businesses, respondents downgraded most hardware, software and Internet-related spending categories as priorities.

More hikes in oil prices and declines in stock prices also are likely. On the day of the attacks, oil prices jumped 10 percent before settling on a 5 percent increase for the day. If the United States retaliates militarily, we can expect a much sharper oil-price hike. During the Gulf War, oil prices reached an all-time high of about $40 per barrel, compared with about $28 per barrel before last week's attacks.

Though U.S. financial markets closed on the day of the attacks, European and Asian markets dropped between 4 percent and 8 percent for the day, recovering less than half that loss the following day. A similar fall in the U.S. stock market would foster pessimism and uncertainty among businesses and consumers, further exacerbating the slumping economy.

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{C}Deeper cuts in interest rates are very likely, and government budgets,particularly for defense and intelligence,almost certainly will see big increases. Those moves alone, however, wouldn't offset the impact of reduced consumer and business spending, higher oil prices, a restrained stock market and other negative economic factors.

The Federal Reserve will be particularly aggressive in reducing short-term interest rates to bolster confidence in global financial markets. Yet the effect of last week's events on longer-term rates,which are crucial for mortgage lending and business investment,is more uncertain. Over the past year, long-term rates haven't slipped as far as short-term rates because of investors' lingering fears of inflation as the economy recovers.

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In the technology arena, security concerns will become more prevalent amid the fear arising from the attacks, solution providers said. The federal government will increasingly call upon security solution providers as the FBI and other intelligence agencies, armed with more funding, step up the surveillance of Web sites with known or suspected connections to subversive and terrorist groups.

Solution providers also are expected to be enlisted to sharpen government and business access controls and personnel verification.

"Controlling who gets in and out of a building, and making sure they are who they say they are, will be big," said Bill Walker, owner of Service Solutions, a Davenport, Iowa-based solution provider. "This is especially true for government and military installations, as well as educational institutions."

, John Roberts, an economist, is CRN's Director of Editorial Research.