U.S. Economic Outlook: The Impact of Terror Russell Lamb North Carolina State University Campus Box 8109 Raleigh, NC 27695-8109 [email protected] .

U.S. Economic Outlook: The Impact of Terror

Russell Lamb

North Carolina State University

Campus Box 8109

Raleigh, NC 27695-8109

[email protected]

http://www.ag-econ.ncsu.edu/faculty/lamb/lamb.htm

U.S. Economic Outlook

• The situation before September 11

• Direct and indirect economic effects

• Intermediate and long run outlook

The situation before September 11

• A slowdown in the U.S.

0

1

2

3

4

5

6

7

8

9

94QI 95QI 96QI 97QI 98QI 99QI 00QI 01Q1

U.S. GDP GrowthPercent Change , SAAR

-2000

-1000

0

1000

2000

3000

4000

5000

Payroll Employment GrowthThousands of Jobs

-80

-60

-40

-20

0

20

40

60

94QI 94QI 95QIII 96QII 97QI 97QI 98QIII 99QII 00QI 00Q4

Inventory Investment, ChangeBillions of 1996 Dollars

-20

-15

-10

-5

0

5

10

15

20

25

94QI 94QI 95QIII 96QII 97QI 97QI 98QIII 99QII 00QI 00Q4

Business Fixed InvestmentPercent Change, SAAR

-20

-15-10

-5

0

510

15

20

2530

35

94QI 94QI 95QIII 96QII 97QI 97QI 98QIII 99QII 00QI 00Q4

Equipment and SoftwarePercent Change, SAAR

The situation before September 11

• A slowdown in the U.S.

• A weaker world outlook

GDP Forecasts

World Economic Outlook

1999 2000*

World 3.5 4.8

* Forecasts as of May 2001Source: IMF, World Economic Outlook

2001*

3.2

U.S. 4.2 5.0 1.5

E.U. 2.6 3.4 2.4

Canada 4.5 4.7 2.3

Japan 0.8 1.7 0.6

Mexico 3.8 6.9 3.5

Dev. Asia 6.1 6.9 5.9

The situation before September 11

• A slowdown in the U.S.

• A weaker world outlook

• But hope for a fairly quick recovery

0

1

2

3

4

5

6

7

94QI 94QI 95QIII 96QII 97QI 97QI 98QIII 99QII 00QI 00Q4

Personal Consumption Expenditures

Percent Change, SAAR

-20

-15

-10

-5

0

5

10

15

20

25

94QI 94QI 95QIII 96QII 97QI 97QI 98QIII 99QII 00QI 00Q4

Residential InvestmentPercent Change, SAAR

-10

-5

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*

New Home SalesPercent Change, SAAR

1

2

3

4

5

6

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01

Consumer Price Inflation

Percent Change from Year Earlier

Core - CPI

CPI

0

1

2

3

4

5

6

01/02/01

Interest Rates

Percent

Daily Fed Funds RateThrough 9/16

-500

-450

-400

-350

-300

-250

-200

-150

-100

-50

0

98:Q1 99:Q1 00:Q1 01:Q1

Trade Deficit

Billions of 1996 dollars

U.S. Economic Outlook

• The situation before September 11

• Direct and indirect economic effects

4.84 3.9

2.61.9

Airlines Hotels Securities Comm. Restaurant

Direct economic impact: Sept.$25 Billion total

Billions of $

Source: RFA/Economy.com

-2

0

2

4

6

8

10

98QI 99QI 00QI 01Q1 02Q1

Direct economic impact: Recession

Percent Change , SAAR

Source: DRI-WEFA

-3

-2

-1

0

1

2

3

4

5

6

7

98QI 98QIII 99QI 99QIII 00QI 00Q3 01Q1 01Q3 02Q1 02Q3

Personal Consumption Expenditures

Percent Change, SAAR

-20

-15

-10

-5

0

5

10

15

20

25

98QI 98QIII 99QI 99QIII 00QI 00Q3 01Q1 01Q3 02Q1 02Q3

Business Fixed InvestmentPercent Change, SAAR

U.S. Economic Outlook

• The situation before September 11

• Direct and indirect economic effects

• Intermediate and long run outlook

Intermediate and long run outlook

• The federal government has responded with aggressive fiscal and monetary policy.– The Federal Reserve lowered its target for the fed funds rate to

3.00 %– Federal reserve has pumped $100 billion in liquidity into the

banking system– Congress passed legislation approving $40 billion for

cleanup/recovery/security and an additional $15 billion for airlines

– By one measure, this is more than the immediate economic impact of the disaster.

Intermediate and long run outlook

• The federal government has responded with both fiscal and monetary policy.

• The key to the outlook is the consumer sector. Will household spending pull back generating a second wave of falling profits, and a recessionary spiral?

How will the consumer respond?• Consumer confidence was plummeting before

September 11, in response to a weak employment picture and declines in stock market wealth.

• Further job losses are on the way, adding to a weak employment picture. U.S. based airlines have already cut 80,000 jobs, and more may be coming. Firms in lower Manhattan will see job losses as well. The economic slowdown will lead to more widespread job losses.

• In spite of Federal Reserve moves, and a lowering of interest rates by European and UK central banks, the stock market had its worst week ever, losing 12-14 % of its value, wiping out $1.4 trillion in equity.

Addendum: What does it mean for Ag?

• A jittery consumer will mean less spending, all the way around. Families will save in anticipation of an economic slowdown.

• Less spending means consumers are less likely to eat out, hurting food-away-from-home consumption.

• Domestic demand for ag products will be dampened by the downturn.

Addendum: What does it mean for Ag?

• A weakening U.S. economy usually means a falling dollar, as investors lose interest in U.S. markets and interest rates fall from monetary policy actions.

• At this point, declines in U.S. interest rates are being matched by declines in rates abroad, in the ER, UK, Canada, and Japan.

• There is no visible decline in the value of the dollar. The U.S. dollar remains the world’s currency of choice.

• Ag exports will not benefit from a weaker dollar in the near term.

U.S. Economic Outlook

• The situation before September 11

• Direct and indirect economic effects

• Intermediate and long runlong run outlook

U.S. Economic Outlook: The Impact of Terror

Russell Lamb

North Carolina State University

Campus Box 8109

Raleigh, NC 27695-8109

[email protected]

http://www.ag-econ.ncsu.edu/faculty/lamb/lamb.htm