A NATION CHALLENGED: THE OUTLOOK; Only Certainty To Economists Is Dire Outlook

NYT, October 4, 2001
LESLIE EATON

As President Bush met with corporate executives yesterday to discuss the national economy, New York politicians, economists and business leaders began to grapple with an economic outlook that ranges from awful to appalling.

The number of jobs in the city has probably plunged by 28,000, and is likely to drop by at least 40,000 more this year -- maybe by 87,000 if the national economy stumbles into a severe recession. The unemployment rate, already edging up to 5 percent, could end the year as high as 6.7 percent, and might hit 8 percent by the end of next year. And the city's economy, which before the attack on the World Trade Center on Sept. 11 appeared likely to grow slightly in the just-ended third quarter of the year, instead shrank sharply.

All of these statistics come from forecasts produced by Economy.com, which specializes in regional financial data. While many economists have been reluctant to assign such specific figures to the future, they tend to agree with the thrust of the analysis, which foresees a very hard end to 2001.

''There's going to be a very painful contraction,'' said Rae D. Rosen, a senior economist with the Federal Reserve Bank of New York. Like many analysts, she predicts that things will improve early next year, but ''a lot depends on how quickly people are in any position to rebuild.''

Even if that rebuilding begins relatively soon, not everyone thinks the rebound will be sharp.

One is Stephen Kagann, the chief economist for Gov. George E. Pataki, who said yesterday that many areas that had experienced disasters like hurricanes and earthquakes had seen their economies bounce back quickly when federal aid and insurance money kicked in.

But in those places, he said, most of the damage occurred in residential areas, where homes could be repaired with relatively small sums of money.

''When people's houses are wrecked or damaged, they can move very quickly -- I call it the Home Depot effect,'' Mr. Kagann said. Spending to rebuild Lower Manhattan's business district, he said, is likely to happen at a slower pace.

There are many imponderables that are making economists' crystal balls even cloudier than usual. One, of course, is the amount of federal aid and the speed at which it will arrive. So far, only $126 million in aid has trickled in to the city, according to the office of State Comptroller H. Carl McCall.

While the federal government has released $5 billion of the promised $40 billion in special spending, half of that is going to the Department of Defense and to repair the Pentagon, the comptroller's office said. The Federal Emergency Management Agency is to receive $2 billion, but some of that money will go to Pennsylvania, where a hijacked plane crashed, and Virginia, for the Pentagon. President Bush, during his visit to the city yesterday, announced that he would seek $75 billion from Congress, but that would go toward stimulating the national economy.

The Small Business Administration said yesterday that it had approved 117 loans worth a total of $11.9 million in the wake of the disaster. That is a tiny fraction of the 759 loan applications it has received, and an even smaller fraction of 7,881 applications that businesses have requested but have not sent back to the agency.

Looming even larger are questions about war and about terrorism ''Will there be a more permanent impact, or will people just hole up in their homes, with their home theaters?'' asked Robert Kurtter, a senior vice president at Moody's Investors Service, which analyzes the city's economy for investors. ''I don't think any of us have built in an assumption of perpetual terror attacks or war, but it's clearly a risk.''

Another question for economists is what will happen to the national economy, which had been skidding into recession before Sept. 11. That prompted Mark M. Zandi, the chief economist at Economy.com, to develop three forecasts of the aftermath, which are progressively more negative depending on the national situation.

For example, his predictions for the city's unemployment rate at the end of 2002 range from 6.4 percent to 8 percent. If the twin towers had not collapsed, that rate would have probably been about 5.2 percent, he said.

In New York City, a group of economists and consultants is racing to put together a detailed description of the state of the city's economy before the attack, the short-term effects and the long-term outlook. The effort is being organized by the New York City Partnership, a business group, because ''after the loss of lives, the loss of livelihoods is the next most urgent issue to address,'' said Kathryn S. Wylde, the group's president.

The city's economy, so strong for so long, had already begun slipping before the trade center disaster.

But the collapse of the towers toppled three of the city's most important engines of economic growth: finance, tourism and entertainment, and retailing.

The loss of life has been, of course, the worst thing. Some small but important Wall Street firms like Keefe Bruyette and Cantor Fitzgerald were devastated in the attack.

Several very large firms, like Merrill Lynch and Lehman Brothers, had to move their operations to other parts of New York and to New Jersey. Others, like Goldman Sachs, were simply shut out of their offices for almost a week.

The Securities Industry Association, the trade group for financial firms, estimates that 45,000 employees of its members and their suppliers had to leave Lower Manhattan; about 25,000 of those found space elsewhere in the city.

The good news is that the Federal Reserve's move to slash interest rates helped keep firms' losses relatively small, said Frank Fernandez, chief economist of the Securities Industry Association. The bad news is that those operating losses do not include the billions of dollars firms have spent and will spend to replace the property that was damaged and for relocation, he said.

Many of the 14,000 businesses in Lower Manhattan that were affected by the disaster were small shops selling jewelry or cigars or offering shoe repairs. Others were restaurants that cater to the Wall Street crowd. While business seems to be coming back near the tip of the island, many shops near the trade center remain closed, and the city's consumers are keeping their credit cards in their wallets.

Empty tables are easy to find at restaurants all over Manhattan, and probably half the hotel rooms in town are vacant, said John A. Fox, senior vice president of PKF Consulting. Typically, he said, occupancy rates would be as high as 95 percent in October, one of the busiest months in New York's hotel business. ''This couldn't have happened at a worse time,'' he said.

On the other hand, there are some signs that tourism may be ticking up a bit. ''You see on a daily basis that people are regaining confidence in airlines,'' said Arnon A. Mishkin, a partner at the Boston Consulting Group, one of the firms working on the New York City Partnership's economic study.

The weekend after the trade center disaster, he bought tickets to the ''Lion King'' -- for that day's performance, he said, adding, ''You can't do that any more.''