Terrorism takes toll on economy

WASHINGTON -- The U.S. economy, weak from a yearlong slowdown and battered by the terrorist attacks, declined in the July-September quarter in the strongest signal yet the country has slipped into a recession.

The Bush administration insisted that quick congressional passage of a stimulus package could avoid a full-blown downturn.

Private economists said the real worry now is whether a mild recession will become something much worse as a result of more threats of terrorist attacks.

"I think the economy is going to continue to struggle until a sense of personal safety has been re-established," said Mark Zandi, chief economist at Economy.com. "Right now the economic clouds are thick and growing darker."

The Commerce Department report Wednesday showed that the gross domestic product -- the country's total output of goods and services -- declined at an annual rate of 0.4 percent in the third quarter.

A recession is usually defined as at least two consecutive quarters of falling GDP. Economists predicted even worse news in the current October-December quarter as continued fallout from the Sept. 11 attacks and new worries about anthrax in the mail deepen consumer gloom.

Consumer spending, which accounts for two-thirds of GDP activity, is likely to be depressed even more in the coming months as incomes suffer from the rising toll of layoffs.

"While the government is doing its part to boost demand, my belief is that this will be overwhelmed for awhile by the events of Sept. 11," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. "Things are much more uncertain now and the apprehension and fear needs to fade."

Other economists said the downturn could be mild and over by early next year, given the aggressive interest rate cuts by the Federal Reserve, increased government spending for reconstruction and further tax relief pending before Congress.

President Bush used the release of the GDP figures to increase pressure on Congress to pass "before the end of November" a stimulus package along the lines he has outlined.

He said the decline in GDP was no surprise.

"After all, we're at war, and for the first time in our nation's history, part of the battlefront is here at home," Bush said.

His Treasury secretary, Paul O'Neill, told reporters that prompt action by Congress on the stimulus package presented a "plausible argument" that the fourth quarter GDP could be "mildly positive."

But private economists said the downturn, which would be the country's first in more than a decade, will likely be dated back to April or May, when a variety of indicators in addition to the GDP peaked and began to turn down.

The GDP was barely positive in the spring quarter -- at an annual rate of just 0.3 percent.

More rate cuts?

The Federal Reserve has cut interest rates nine times this year; two reductions came after the attacks. Many economists are looking for further cuts when the Fed meets on Tuesday and at the central bank's final meeting of the year on Dec. 11.

The Fed has room to lower rates further because the weak economy has kept a lid on inflation. An inflation gauge tied to the GDP fell at an annual rate of 0.4 percent in the third quarter, the first decline in four decades.

In the third quarter, business investment in new plants and equipment, severely depressed since the bursting of the bubble in high-tech stocks, fell at an annual rate of 11.9 percent. It was the third consecutive quarterly drop.

Consumer spending, which had been keeping the economy afloat, did rise, but at a weak rate of 1.2 percent, the poorest showing since early 1993.

David Orr, an economist at Wachovia Securities, said that a statistical quirk in the way the government accounts for insurance coverage supplied by foreign firms had artificially boosted third quarter GDP. Without this impact, he said the decline would have been closer to the 1 percent drop analysts had been expecting.