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The Argument Against Gloom

It's easy to posit a bearish outlook for the near future. Here's the other side.
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SAN FRANCISCO -- Although it pales in comparison to the human tragedy, the assessment of the economic impact of Tuesday's events continues. Obviously, it's pretty easy to make a bearish case right now. This column attempts to provide a contrary view -- not because it's my job to provide uplifting commentary (as a handful of misguided readers seem to think). Rather, this column has always strived to provide an alternative to the so-called conventional wisdom, which is understandably dire regarding the economic impact of recent events.

But "my view is that unless we react in a very poor way to this horrific event, it will not have a material impact on the course of the economy," said Edward Leamer, a professor of economics, management and statistics at the University of California at Los Angeles' Anderson School of Business.

Note, Leamer is no economic Pollyanna. Late in 2000, he forecast the U.S. economy would experience "slight negative growth" in the second and third quarters of 2001, and believes the economy is currently in recession.

But the professor compared Tuesday's tragedy to disasters such as the

Northridge earthquake near Los Angeles in 1994. The quake caused $23 billion of damage but California's economy grew faster in the quarter after the quake, he recalled.

Estimates range between $15 and $30 billion regarding the direct damage caused by Tuesday's attacks. But the harsh reality is there will be billions spent on construction projects, the retooling of businesses and even corporate advertisements in the wake of Tuesday's harrowing events.

"A recession is a sustained period of unwanted idleness, but natural disasters ... get us working harder to create jobs," Leamer continued. "There might be significant economic losses in physical damage, but

capital flows increase because we'll all work harder and government expenditures are definitely part of the story."

Indeed, the White House has requested a $20 billion emergency aid package and additional spending by federal, state and local governments is likely. Politicians are also now more open to tapping the Social Security surplus, which most economists argue is prudent given the economy's tenuous state.

Although government spending, not consumer spending, kept the GDP out of negative territory in the second quarter, Leamer agreed further damage to consumer psychology is the biggest economic threat posed by Tuesday's tragic events.

The University Of Michigan reported Thursday that a preliminary survey, taken prior to Tuesday's events, showed consumer confidence in September fell to its lowest level since March 1993. There are worries that reverberations from the terrorist attacks will further dampen consumer sentiment, greatly curtailing the economy's recovery effort.

Reports immediately after the attacks that Americans will not buy cars or other big ticket items are "probably right for a couple of days, but we'll get beyond that," Leamer countered. "I have complete confidence Americans are going to persevere. If we do that, there's not going to be a huge economic consequence."

It may sound callous but consumers who've been holding back might reflect on the tenuousness of life and decided to splurge. I'm no fan of rampant consumerism but the term "retail therapy" comes to mind. The proverbial mountain of cash on the sidelines might not find its way back into stocks, but might end up at the mall.

Other Issues

Many observers expect "climatic selling and climactic fear" when equity trading resumes, now scheduled for Monday morning at 9:30 a.m. EDT, as Bernie Schaeffer, president and CEO of Schaeffer's Investment Research in Cincinnati wrote Wednesday.

But while others expect such selling to trigger the much-anticipated capitulation bottom, Schaeffer believes 'the ultimate bottom remains a good distance down the road in time and in price."

Another scenario being considered is that an injection of liquidity by global central banks -- which have already added more than $100 billion in liquidity into the financial markets -- combined with a sense of patriotism among U.S. investors will buoy stocks early next week. Additionally, the

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Securities & Exchange Commission

is considering making it easier for companies to engage in stock buybacks, which would also stem losses in specific issues.

Regardless, the short-term fate of equities is "not critical to the path of the economy," Leamer argued, because the market is now acting mainly as a vehicle for the trading of existing assets rather than as a funnel for capital into new ideas. Unlike when IPOs were coming at a record pace in 1998-99, Wall Street is not at the center of the economy, he said.

It's probably heretical to many investors, but the stock market "could be suspended for some considerable period without doing damage to the economy," Leamer suggested.

The fate of the dollar is another area of concern for investors and economists.

Leamer frets the dollar is overvalued but believes, as do many, a prolonged but steady depreciation will be economically manageable. Thus, he was heartened by the dollar's strength vs. other major currencies Wednesday and Thursday after it stumbled Tuesday in the wake of the disastrous events.

Dollar bears contend the currency is merely being propped up by a coordinated effort by the world's central banks. Such efforts and an unspoken agreement among traders to not profit from the tragic events will prove fleeting, the bears expect. Following impeachment, a contested election, 18 months of a steep bear market, economic malaise, and now attacks on our financial and military centers, it's not hard to see why some believe America's prestige has been weakened, with negative implications for the dollar.

But "speculation the dollar could be vulnerable is wrong," according to David Gitlitz, president and chief economist at DG Capital Advisors New Jersey. He argued central banks, including the

Federal Reserve

, are meeting demand for increased liquidity, not propping up the dollar.

Furthermore, Tuesday's terrorist attacks will most likely result in a "higher aversion to risk," particularly by foreign investors, which will foster investment in dollar and dollar-denominated assets, Gitlitz said.

This week's sharp rally in Treasury securities, which on Thursday left the yield on the two-year note at 2.98%, its lowest level since 1958, is a prime example, he said. The yield on the benchmark 10-year note fell to 4.62%.

Still, like Leamer, Gitlitz is not sanguine about the U.S. economy. He believes the Fed needs to ease by 100 basis points but isn't sure if they're "willing to go that far."

Fed fund futures are pricing in an increased likelihood of another rate cut before the Fed's next scheduled meeting on Oct. 2, but 100 basis points seems unlikely. Still, after the extensive easing already enacted, in addition to the $1.2 trillion tax cut, represent a potentially powerful stimulus to the economy.

Additional rate cuts could further spur the recovery, which may come sooner than many observers currently dare contemplate.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.