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Monday, 8 October, 2001, 21:03 GMT 22:03 UK
Retaliation may hinder US economy
George W Bush
President Bush's military action may damp consumer demand
David Schepp

The US-led retaliatory attacks on Afghanistan may offer a boost to the nation's flagging economy by boosting consumer confidence - or further heighten economic uncertainty.


If there are [further terror attacks], then I think they can have a really chilling effect on consumers

Greg Valliere,
managing director, Schwab Washington Research Group
Analysts say fear of further terror acts on US soil may result in US consumers remaining cautious until more is known about Washington's long-term plans to counter domestic terrorism.

"Everyone is in a state of uncertainty, and uncertainty is not good for consumer confidence," says Anthony Chan, chief economist at Banc One Investment Advisers in Columbus, Ohio. "It's not good for consumer spending."

Too soon to tell

It is too soon to tell how tentative consumers are. Recent indications have shown consumer confidence falling to its lowest level in eight years.

On the other hand, auto makers reported sales last week that were better than expected, given the terror attacks on the New York and Washington, which have left nearly 5,600 dead or missing.

NYSE chief executive speaks, while House Speaker Dennis Hastert looks on
NYSE CEO Grasso agrees with lawmakers in the need for Congress to act quickly
Healthy incentives from Ford and General Motors were partly credited for strong sales in the last weeks of September. Both auto makers have offered 0% interest deals on new models in patriotically themed promotions.

Still, the drop in consumer confidence was not unexpected with economic policy makers warning of an Americans' reticence to splurge on big-ticket items.

Greenspan speaks

"The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in a pronounced disengagement from future commitments," Federal Reserve Chairman Alan Greenspan said nine days after the attacks.

"And that, in the short run, would imply a lessened current level of activity," he says.

US House of Representatives Speaker Dennis Hastert
Hastert: "We want to stimulate consumer confidence"
In a nod toward reducing the uncertainty among consumers, the US central bank knocked one full percentage point off its key fed-funds rate, reducing it to 2.5%.

The cuts are part of nearly $100bn stimulus package the president hopes will reinvigorate the flagging economy. Aside from cuts in interest rates, Congress has also approved $15bn in aid for stricken US airlines and $20bn to assist New York, Washington and western Pennsylvania.

Calls for more tax cuts

Nevertheless, Mr Bush on Wednesday called on Congress to pass an additional $60m in economic incentives - some in the form of additional tax cuts.

Analysts for the most part agree on the need for an additional stimulus package.

"I'm in the camp that thinks that with so much stimulus and more to come... the economy could bounce back very strongly," says Greg Valliere, managing director at Schwab Washington Research.

He adds that much depends on whether there are additional terror attacks in the US or western European countries.

Chilling effect

"If there are, then I think they can have a really chilling effect on consumers," Mr Valliere says.

In acknowledgment of the concerns of American consumers, several key legislators journeyed to Manhattan to the New York Stock Exchange (NYSE) to hold a meeting with business officials, including NYSE chief executive Dick Grasso on Monday.

Speaking to reporters after the meeting, House Democratic Leader Richard Gephardt said Congress needed to act quickly - in the next week or so - to put together a package that would encourage consumers to get out to malls and onto aeroplanes.

The need to move quickly was reiterated by Chairman of the House Ways and Means Committee Bill Thomas and committee member Charles Rangel of New York.

"Congress needs to follow in putting together a [legislative] package... " Mr Thomas said, "that creates the psychology that tomorrow is better than today".

He added that any Congressionally sponsored stimulus package must happen in October.

See also:

08 Oct 01 | Business
Calm returns to markets
03 Oct 01 | World
Bush package to boost economy
02 Oct 01 | Business
Analysis: The Fed's next move
02 Oct 01 | Business
Fed cuts rates for ninth time
02 Oct 01 | America attacked
Analysis: Bush counsels Bush
02 Oct 01 | Business
Shares gloom ahead of fourth quarter
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