Is the attack on the World Trade Center the worst possible news for an already shaky economy? Is a "full-blown global recession" -- as Sung Won Sohn, chief economist at Wells Fargo & Co., predicted on Tuesday -- "highly likely?"
Many economists think so. The destruction of one of the preeminent symbols of American capitalism comes at a time when unemployment is spiking up, the markets are depressed and nations all over the world are watching growth rates plummet or disappear. As Robert Litan, an economist at the Brookings Institute, notes, "This is the worst time this could have happened."
But experts are also quick to point out that the attack itself did not significantly damage the nation's economic infrastructure. The flow of capital across the world is unlikely to be disrupted. Oil prices may spike in the very short term, but there is also currently a glut of oil on the market. The dollar may drop and gold may surge -- but in and of themselves, such fluctuations will not determine whether the economy rises or falls.
The single most important factor in predicting what might happen is also one of the most amorphous and indefinable. In the wake of the attack, whither "consumer confidence?"
Technically, consumer confidence is a term used to quantify consumer attitudes about the health of the economy. Practically speaking, it's a measure of their willingness to buy on credit, whether that be houses, cars or DVDs. Consumer confidence is a potent self-fulfilling prophecy: If consumers believe the economy is hurting and stop buying, then the economy will tank -- but if they go to the mall and splurge, it will flourish. And for the last six months, even as growth in the United States has slowed nearly to a halt, consumer spending has continued to be relatively robust.
Now, the horror of the WTC attack is widely expected to challenge consumer confidence more than any other event in recent memory -- more than the Gulf War, the Oklahoma bombing or the collapse of the tech bubble.
"In my book, 'Irrational Exuberance,' I argued that the market was doing so well partly because people forgot that things could go wrong," says author Robert Shiller. "There was no oil crisis, no problems at all. But these things do happen ... People are already having their confidence shaken. This is different than other attacks -- it's a systemic attack."
"I don't think that anything fundamental has been destroyed in our economy," says Steve Golub, professor of international economics at Swarthmore College. "The only thing is the confidence factor."
"Nobody knows what's going on," says Steve Cohen, co-director of the Berkeley Roundtable on the International Economy. "The big potential impact is a slowdown in consumer activity. One reaction that consumers often have to these sort of events [like the Gulf War] is to pull back, either from a lack of confidence or frankly a loss of appetite ... It's not about yesterday's horror, it's that nobody knows what's happening next. When nobody knows, uncertainty leads to very conservative actions on the part of consumers. People buy gold. People put off doing anything. Investors will head to the sidelines. So that's what's in play right now."
"Especially alarming this time around," says Ben Cole, author of "Pied Pipers of Wall Street," "is the much larger fraction of Americans than ever before who invest in Wall Street. So the downdraft on Wall Street could become self-reinforcing to a greater degree than before, leading to lower sales, lesser earnings, and lower Dow again. I do wonder about the long-term mood in Manhattan and NYC. Man, how do you get over this? How many years until a night out on the town in Manhattan can seem carefree and fun?"
Consumer activity has been the main crutch keeping the U.S. economy -- and by extension, the world economy -- hobbling forward over the past year. As manufacturers have shut down factories and laid off thousands of workers, as stock market prices have plummeted, consumers have, much to the mystification of many observers, kept on buying.
Even before the attacks on the Trade Center and the Pentagon, the fall in the Dow and Nasdaq and the spike in unemployment had economists worried that the consumer confidence locomotive was about to run out of steam. But now that the United States has been shaken to the core by the devastation wreaked upon New York's financial district, economists' gloom has deepened.
But there may be some room for optimism. The United States is nothing if not resourceful. So many pundits and politicians have been quick to announce that the attack on the World Trade Center is comparable in scale and devastation only to the attack on Pearl Harbor. If so, could the country pull together in the wake of this horror just as it did in 1941?
"Americans have proved that they can be resilient," says Shiller. "That's the Pearl Harbor story. The market dropped for the first two days after the attack and then kept growing."
"In an emergency of this kind, in all respects people pull together and there will be a can-do spirit," says Golub. "They want to keep on going, they want to keep on working. Basically, everybody is going to work. Basically, everything will carry on as normal."
"There's going to be some initial panic," says Golub, "like when the stock market fell 25 percent in 1997, and Alan Greenspan said a few words and it bounced back. This is obviously more severe than that. But it's not like the whole infrastructure of the U.S. economy has been destroyed. I think we have a pretty resilient economy. That's my guess, and yeah, when people realize that it's a one-time thing and not the end of the world, I think it's going to bounce back, if the central banks are prepared to act."
The question is, how exactly will people bounce back? There is no clearly defined enemy, as in World War II, that can compel citizens to volunteer for the armed forces. There is no pressing need to save every shred of rubber or paper to contribute to the war effort. How can Americans express their patriotic fervor? How will they pull together?
Maybe, by remembering what makes this country's economy great -- shopping. The suggestion may sound facile -- but it also carries with it some possibilities for pyschological satisfaction. Resolute Americans can stand tall by refusing to despair, by holding on to their stocks and heading to the mall -- by continuing to shop, even in the face of unthinkable terror.
"It's not a completely crazy idea," says Terry Odean, a Berkeley economist. "But it might be a hard sell. 'It's your patriotic duty to shop till you drop' doesn't sound ideal. It's easy to understand why people lined up to give blood. People are enthusiastic about pitching in for the common good, but it's hard to convince them to go to K-mart."
"On the work side," continued Odean, "There's that sense that people don't want to give in to this. We don't want to be intimidated so we'll show that we're not scared by working hard. But it's harder to give in to the argument about shopping. Work has a connotation of doing something for society, but it's harder to make people believe that it's their duty to go to the mall."
"Wall Street will have an easier time," says Odean. "People will have a sense that selling isn't right. If there's a correlation between patriotism and investing -- and I think there is, though it's slight -- I think people might say, I'm not going to sell my stock because it's a vote against the country. It's likely that people will not sell out of a sense of duty."
So should President Bush recommend a national shopping spree? Could he pull it off?
"It's going to be very hard to spin people into shopping," says Sendhil Mullainathan, a behavioral economist at MIT. "The Fed has been working hard to fight paranoia, but going even further will be tough."
"There is one thing, though, that fits with the theory [of Americans turning a crisis into a boom]," adds Mullainathan. "There are several studies showing that during war times, efficiency goes up. There are different reasons, but one of the things that these studies show is that a lot of economic activity works according to goodwill. You don't have to do a good job, but if you feel connected to work, then you work harder, your efficiency goes up. So if this country enters a mentality of war, a united front, then it's possible that their efforts will turn the economy around."
There are some other factors that could boost the economy -- a surge in defense spending, reconstruction of New York's financial district, continued moves by the Fed to lower interest rates. But it's a tough call to predict where things will go, if the general public doesn't continue pulling out some plastic.
"There is some chance [for an economic revival]," says Cohen. "There's likely to be a sudden burst in government spending, and maybe emergency interest rates will decline to kind of push things along. But that's where the big uncertainty is. And that's a genuine uncertainty. Nobody knows."