Up From The Ashes

Just a day after the World Trade Center was flattened, tens of thousands of New Yorkers gamely hopped a train or a cab or walked to work as usual. What else were they going to do? Quit? Not likely. Similar pluck will mark the national economy. Sure, there will be economic tremors from the terrorist attacks. But the likely net effect--purely in economic terms--will be to hurry up and shorten a slowdown already in place and bring a quick end to the bear market that has gripped Wall Street since the Dow peaked in January 2000.

Much hinges on things we can't know. For example, will there be more such assaults? Will U.S. retaliation spur broad unrest in the Muslim world and perhaps threaten oil supplies? Until these questions are resolved, investors and consumers will sit on their wallets. Meanwhile, what we do know is plainly awful. Consumer confidence, already at an eight-year low before last Tuesday, will fall further. George Mees Jr., owner of GEM Floor Sanding Service in Villa Park, Ill., had a sale fall through just hours after the attacks. "I'm sure to get cancellations," he says. "Nobody's going to want to spend money."

Businesses will rein in their spending for a while too, virtually ensuring that the third quarter will become the first one with no economic growth in the past eight years--unless the second quarter gets there first. Domestic output in the second quarter grew at a rate of just 0.17% and could be revised to below zero.

Yet there lies the silver lining. In a matter of weeks, our first recession in a decade could be on the books. If it is and it lasts no longer than the last one (two quarters, the minimum period of contraction that qualifies for the R word), the downturn will be over almost as quickly as it became apparent. Recessions typically last nearly a year. The recent attacks, though, make everything different. Economic gatekeepers are in rare and sudden unison.

The $40 billion that Congress has pledged to help rebuild lower Manhattan and beef up airport security, among other things, will create jobs. And there will be even more spent on the military and possibly on bailouts for such hard-hit industries as airlines and insurers. For those who worry about potential deficit spending--get over it. Economic growth is the priority now. The Social Security "lockbox" was political propaganda anyway. It's all one big budget, and more of it might now be used to cut the tax most people pay on capital gains (remember when you had those?) to 15% from 20%.

The Federal Reserve, by flooding the U.S. banking system with cash, is giving lenders the confidence to extend credit without disruption. Expectations of further Fed cuts in short-term interest rates, along with the flight of money to safe investments late last week, helped push long-term interest rates to their lowest levels since the 1998 Asian financial crisis.