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Posted on 09/29/2001 12:51:47 PM PDT by sarcasm

n the wake of the Sept. 11 terrorist attacks, sales are falling in nearly every sector of the economy — from autos and home building to high technology and department stores — as gloom spreads beyond the airline and travel industries.

As a result, executives in one industry after another are postponing whatever spending they can until the uncertainty lifts and they have a clearer idea of how consumers are reacting to the crisis. "People are saying things like, `We have hit the wall and the fourth quarter will be very bad,' " said Jerry Jasinowski, president of the National Association of Manufacturers, describing conversations with chief executives of companies in his organization.

The damage is considerable. An economy that was barely afloat before Sept. 11 has sunk rapidly in the nearly three weeks since the terrorists destroyed the World Trade Center and damaged the Pentagon. No one predicts that economic activity increased in the third quarter, which ends today. The attacks guarantee contraction, forecasters say, leading to an outright recession if the downturn continues through Christmas.

The immediate economic harm from the attacks was stark, but limited. Airlines shut down, and air traffic is still way off. Industries directly linked to airline travel — hotels, rental cars, aircraft manufacturing, theme parks, airport restaurants — also suffered. Still, the airlines and their satellites represent less than 4 percent of the nation's $10 trillion economy, according to the Commerce Department's Bureau of Economic Analysis — hardly enough to sink the economy alone, short of shutting down almost entirely. The operations of the brokerage firms and investment houses in the World Trade Center were barely visible in the national accounts.

But beyond the immediate damage, the terrorism and the reaction to it — particularly the psychological damage — appear to be rippling through most of the economy, unchecked so far.

"The problems we have now have the potential to become much bigger," said Peter Temin, an economist at the Massachusetts Institute of Technology. "It is the role of government to make sure they don't. Maybe the economy can save itself and maybe it cannot, but it does not look good right at the moment."

The troubles are big and small. Disney and Warner Brothers delayed the release of two expensive films because they dealt with terrorism and a bomb smuggled aboard an airplane. EMC (news/quote), the nation's leading vendor of data storage equipment, announced the layoff of 2,000 employees, 10 percent of its work force, because of a "blanket of hesitation" among its customers, said Joseph M. Tucci, the chief executive.

In Jacksonville, Ark., the Hiwasse Manufacturing Company, which makes control panels for stoves, refrigerators and other kitchen appliances, had to slow production because a technician was afraid to fly to Arkansas from Chicago to repair a balky machine. "We found a way to work around the problem, but at greater cost to ourselves," said J. Richard Derickson, chief executive of Hiwasse.

Consumer confidence, the chief gauge for determining how willing families are to spend, has twisted up and then down in the nearly three weeks since the attacks. The consumer confidence index produced by the University of Michigan rose initially, but plunged in the second week, the university said on Friday.

"The public's first reaction was to reassert confidence that the terrorists were not going to win," Richard T. Curtin, director of the surveys, said in summarizing the results of the 500 phone interviews on which the index is based. "And then in the second week, the reaction set in."

Confidence fell more sharply than at any time since the oil embargo in 1973 and the Iraqi invasion of Kuwait in 1990. It might revive in October absent another terrorist attack or a military operation that heightens the fear of further retaliation, Mr. Curtin said. "Right now," he said, "people tell us they are unsure about their own personal safety, they are concerned about casualties in a military action abroad, and they have decided that this is the moment to be cautious spenders — particularly for major items like homes, autos, appliances, furniture, computers."

The fearfulness was reflected in spending patterns last week. Sales fell at Saks Inc. (news/quote), the Gap, Limited, the Gucci Group (news/quote) and other stores whose upscale merchandise is less than essential, said Richard Baum, a retail analyst at Credit Suisse First Boston (news/quote). At the same time, sales rose for basics — toothpaste, packaged food, shoes, toilet paper, diapers — at Wal- Mart, Kmart and other discount stores. Data gathered from supermarket scanners showed big declines in sales of facial cosmetics and nail polish but a sharp increase in spending on candles.

The question in Mr. Curtin's mind is how long the fearfulness and shock will last. That is also the concern of Andrew Kohut, director of the Pew Research Center, who found in a poll of 1,000 people that 70 percent said they were depressed, 50 percent said they could not focus on their jobs and 33 percent said they were having trouble sleeping.

"People are down, and the question is when they will come back," Mr. Kohut said, noting that in previous crises the bounce-back came relatively soon.

Still, companies are sometimes damaged in ways that do not necessarily hurt the economy. Insurance companies, suffering their biggest single loss ever, are paying out more than $40 billion, but those filing the claims and receiving the money will presumably reinvest it in the economy, particularly to rebuild Lower Manhattan.

Merrill Lynch (news/quote) and Lehman Brothers (news/quote), with offices in the World Trade Center, have been forced to operate at less than full strength since Sept. 11. But their customers are still trading, and brokerage fees that Merrill and Lehman once collected are now going to Credit Suisse First Boston and other firms.

Many restaurants around the country report fewer patrons, but fast-food chains say business is up — not in the restaurants themselves, but at the take-out windows, perhaps reflecting a reluctance to linger in public places.

Among other businesses that have gained, pharmaceutical companies report that sales have risen for sleeping pills and antidepressants. One antidepressant, Zoloft from Pfizer (news/quote), has been specifically approved to treat post-traumatic stress disorder.

The nation's automakers are uniformly suffering. With sales falling, Ford Motor (news/quote), General Motors (news/quote) and DaimlerChrysler (news/quote) have curtailed production and offered zero-interest financing to draw buyers, a tactic that cuts into profits. Heightened border security has delayed the delivery of parts, forcing some plants to close for a day or two and adding to costs indefinitely.

As in many other industries, the savings from strategies that are meant to minimize the expense of keeping inventories have been diluted. Toyota (news/quote), for example, had maintained enough Canadian parts for only one day's production at its three United States assembly plants. Because of unpredictable border delays, that has been doubled to two days' inventory.

For every tractor-trailer that used to make the border crossing, a second is now bringing a parallel shipment, in case one is delayed at the border. "All this adds to cost," said Dennis C. Cuneo, a senior vice president at Toyota. "And there has been another cost. I don't know how you calculate it, but a lot of management's time has been focused in the last three weeks on keeping our plants running."

Apart from the pullback in consumer spending, nothing is more damaging to the economy than the freeze that many executives say has descended on investment in new equipment, computers, software and other tools of production. Spending on information technology in particular has suffered, according to surveys of Fortune 1000 companies by Howard Rubin at the META Group (news/quote).

Eight days after the terrorist attacks, 87 percent of the companies said it was too soon to decide whether to cut their investment spending. But by last Wednesday, 53 percent said they would cut their spending, in some cases by as much as 15 to 20 percent.

Home construction had remained strong in a weakening economy, but builders say that in the wake of the attacks, declining home sales have forced them to pull back. Sales are likely to be off by as much as 6 percent by the end of the year, despite 30-year mortgage rates that have dropped below 7 percent, according to the National Association of Realtors.

That prediction jibes with the experience of Lee Baum, a home builder in Memphis. When the terrorists struck, his company, Baum & Company, had 18 houses in the $200,000-to-$350,000 range under construction. Only three had buyers, while the other 15 were going up in the previously reliable expectation that they would be sold before their completion.

Now, 3 of the 15 are nearly finished but still for sale. "Normally we don't come to completion without having sold a house," Mr. Baum said. Like many other builders, he has decided to pull back on speculative building, or starting new homes before buyers are found, which represents one-third of the single-family home construction in the United States.

The economic damage since Sept. 11 seems to touch dozens of industries. Movie attendance is down, apparently out of a fear of terrorism in public places, and the recording of new music is likely to suffer, says Richard D. Parsons, co-chief operating officer of AOL Time Warner (news/quote).

"In things like the record business," he said, "where people just don't want to travel anymore, things will slow down on the production side because just getting the artists there to record or release or promote is difficult."

The airlines are the hardest hit, laying off 100,000 workers already and still not able to cut costs enough, industry executives say, to offset their losses. Passenger traffic last week averaged less than 50 percent of capacity, and even with billions of dollars in emergency support from the federal government, the airlines said they will lose money until the average rises above 50 percent.

The reluctance to board a plane causes Mr. Kohut, the pollster, to wonder when the economic damage from the terrorist attacks will begin to fade. "We have to recognize that this is a mood in America unlike any we have ever seen before," he said. "It could last, or people could snap out of it."

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