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U.S. economy proved unexpectedly resilient


Much has been written about heroes in the past year, but the unsung hero has been the American consumer, who almost single-handedly prevented the country from plunging into a deep and prolonged recession.

Immediately after the Sept. 11 terrorist attacks, many economists feared a crippling of the weakened U.S. economy. But if the American spirit was shaken, it didn't keep people from spending.

A year later, experts compare the attacks to a hurricane - they were swift and violent. The damage to the economy, though, wasn't as devastating as expected. The consumer and the economy proved themselves more resilient than many had thought.

"The consumer has essentially been the whole story. The consumer has kept the economy aloft," said Thomas F. Carpenter, chief economist at ASB Capital Management Inc. in Washington.

"It was cataclysmic for a very short time," added Steve Cochrane, senior economist at Economy.com Inc., an economic forecasting and consulting firm based in West Chester, Pa. "The immediate impacts are pretty much over."

Just weeks after the attacks, the gross domestic product - a key measure of the health of the economy - grew at a solid 2.7 percent annual rate in the fourth quarter of last year and then surged to a 5 percent rate in the first quarter of this year.

"We had a robust growth rate," Carpenter said. "That was generated by a huge increase in consumer spending, which continued into the first quarter and the second quarter."

Some sectors suffered, to be sure. The airline, travel and tourism industries are still fighting to recover.

The airline industry, which was struggling before the Sept. 11 attacks, lost hundreds of thousands of passengers and a staggering $7 billion last year.

The fallout further weakened financially strapped US Airways Group Inc., which filed for bankruptcy protection last month. United Airlines Inc., the nation's second-largest carrier, has announced that it also may be forced to seek Chapter 11 protection.

Theme parks such as Disneyland and Universal Studios saw attendance drop at least 10 percent last year. Many parks continue to struggle for customers and are offering steep discounts.

Hotels fared little better, with occupancy rates diving 15.9 percent last September from a year earlier, according to Smith Travel Research, an independent lodging research firm. Although rates have rebounded, they remained down almost 2 percent in the first six months of this year.

The attacks were "devastating" for these industries, said James W. Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "There was a time that [business] virtually came to a standstill for both the airline industry and the entertainment or travel industry. It was purely related to the fear of terrorism ... and not wanting to be anywhere else but your home."

Layoffs rose as some companies halted production for several days and the demand for products and services fell, said Diane Swonk, chief economist of Bank One Corp. in Chicago.

Orders to factories for durable goods, such as refrigerators, airplanes and machinery, fell to the lowest levels since August 1996.

"The hunkering down, the cutting costs, the cutting back ... was just unbelievable," she said. "Many manufacturing plants actually shut down, and corporate America shut down."

Kate Ragan, 38, a married mother of two children, was a casualty of the corporate retrenchment.

She lost her $75,000-a-year job as an employment recruiter 17 days after the planes struck the twin towers and the Pentagon.

"I certainly thought 9/11 played a part in it," said Ragan, who lives in Havre de Grace and worked for Info Systems Inc., an information technology consulting firm based in Wilmington, Del. "My whole life changed since then, but nothing compared to people who actually went through the tragedy firsthand."

Ragan, who had been a recruiter for 13 years, collected unemployment for the first time in her life. "I didn't feel guilty," she said. "I was happy that it was there."

In July, she became a self-employed independent recruiter, but she still hasn't found a full-time job.

"It has just been really, really difficult, just not a lot of opportunities and extremely competitive," Ragan said. "I feel like I have all the tickets. I feel I was very successful."

Areas of strength

Some sectors flourished, with people taking advantage of low interest rates and federal tax cuts. The Federal Reserve Board cut interest rates four times from Sept. 17 to Dec. 11 - slashing them from 3.5 percent to 1.75 percent, the lowest level in 40 years.

Auto sales were brisk, home sales soared, and businesses that dealt with personal and corporate security were caught without enough personnel.

Consumer spending slowed about 2 percent in September, but surged the next month and remains strong today.

"The psychological effect on household spending and business confidence never seemed to materialize," said Michael R. Englund, chief market economist at Standard & Poor's in New York. "There didn't appear to be a fear factor in their spending."

Instead of taking vacations, people snapped up big-screen television sets and DVDs and took advantage of low interest rates, Englund said.

"If you are not going to spend it on a vacation, people are going to look for other things to buy," he said.

General Motors Corp. reported a 31 percent jump in auto sales in October from a year earlier; Ford Motor Co.'s were up 36 percent; and Honda Motor Co. Ltd., saw sales rise 19 percent.

Homes sold almost as fast as they were built or listed. Homeowners rushed to refinance their homes, lured by record-low interest rates.

"December was unbelievable, a refi [refinancing] boom like I have never seen," said Patricia Savani, manager of the Annapolis region for Champion Realty. "The loan officer here couldn't move fast enough. The refi wave in December was nothing short of phenomenal. People stepped right back in and started buying houses."

Jeanette Willoughby, a 27- year-old single mother, jumped at the low rates.

Willoughby was renting a two-bedroom apartment in Carney in December when she was told her rent would rise $60 a month to $700. She quickly began hunting for houses while rates were low.

"I decided this is it, I am not going to rent anymore," said Willoughby, an accounting clerk at Morgan State University. "I am not going to pay this much for rent. I am going to buy a house."

Less than three months later, she settled on an $86,000 three-bedroom house in Northeast Baltimore with a garage, a newly remodeled kitchen, two refrigerators and a pool table. Her monthly mortgage payment: $590 on a 30-year loan.

Another industry that boomed after the attacks was business and personal security.

"We couldn't satisfy all of the demand," said Stephen J. Shaw, manager of business development at Pinkerton/Burns Security in Baltimore. "My phone rang for about two weeks straight."

Corporations wanted additional security guards patrolling their buildings, and some hired plainclothes specialists to protect executives.

Robert Donald, a Pinkerton/Burns employee who was director of security at Boston Properties' 100 E. Pratt St. building, worked 30 hours in the first 48 hours after the attacks.

Donald, who recently became director of security for another company, had been averaging about 15 hours a week in overtime since the attacks, increasing his annual take-home pay by roughly $15,000, to about $50,000 a year, he said.

"Overtime, that is a given," said Donald, 49. "I have reaped the benefits, both good and bad. The family life is strained, but when the paycheck comes in, there's not too much moaning and groaning."

Despite the trauma of the attacks, many experts say the economy is growing and will strengthen toward the end of the year.

Recession accelerated

Some economists believe that Sept. 11 nudged the country into recession, though many others say the economy had been heading for a fall.

"I think the economy was going into recession anyway without 9/11," said Paulsen, the Wells Capital investment officer. "I think it [the attack] altered the pattern; it sort of accelerated what would have happened."

But most economists agree that the impact of the attacks has been relatively small.

Still, some worry that the economy could feel the effects of the attacks for years to come. Corporate insurance costs have risen, and transporting products over international borders is more difficult, said Charles W. McMillion, chief economist at MBG Information Services in Washington.

"It has put sand in the gears of all of the supply chain around the world," McMillion said.

Yet the economy survived, said Swonk, the Bank One economist. "It was remarkably resilient. For the economy, it was much less cataclysmic than it was for individuals."

Swonk said the economy's recovery from the attacks is testament to its ability to handle extraordinary stresses and strains.

In a 21-month period - from January 2000 to last September - the economy overcame Y2K fears that computers around the world would malfunction, the dot-com implosion, the stock market meltdown and the Sept. 11 attacks, she said. Besides that, it has survived the Enron debacle and other large bankruptcies and corporate accounting scandals.

"It gets to our adaptability," Swonk said. "We have the most flexible, adaptable economy in the world. We did what Darwin said we do best: We adapted."

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