Last week's terrorist attacks essentially cemented the U.S. economy's slide into recession, said several economists at this week's Foreign Policy Association-sponsored World Leadership Forum.
"I think the probability has now tilted toward a technical recession," said Princeton University economics professor Alan Blinder.
Before Sept. 11, some sectors of the U.S. economy were weak but consumer spending remained high. "Spending is almost certainly declining now," Binder said, citing shaken consumer confidence. The economy also faces "considerable peril" of worldwide oil shocks if relations sour between the U.S. and major oil-producing nations.
"My view is that it's now clear that the U.S. is in a recession," concurred Jeffrey Applegate, chief investment strategist at Lehman Brothers. "The attack is going to make the recession deeper and steeper than it would have been. Corporate earnings in the U.S. and around the world are going to be very disappointing. They're going to be way below what the analysts had expected."
While most prognosticators at the conference agreed that the economy will continue to weaken in the next few months, they disagreed sharply about the length and severity of the expected recession.
The sudden economic shock of the attacks may help the economy rebound, Binder said. "We'll probably come out of this much more vibrantly than we expected before," he said. Companies will accelerate another round of inventory unloading, he forecast, precipitating a further drop but sparking a "V-shaped" recovery, in which a quick drop to the bottom is followed by a slingshot return to growth.
He also noted that the U.S. Federal Reserve has already begun taking steps to spur growth, before a single quarter of negative growth. (A recession is defined as two consecutive quarters of negative growth.) "We don't usually have the foresight to pull the monetary and fiscal levers in advance of a recession," he said.
But other speakers disagreed with Binder's optimism, arguing that the market remains fundamentally out of whack. While the American economy is "the strongest in the world," it currently features a high level of consumption relative to income and savings, said Paul Volcker, former chairman of the U.S. Federal Reserve. "At some point there has to be a much more serious adjustment than anything that went on this year," Volcker said.
The U.S. stock market won't recover without a "panic sell-off," said two longtime market observers.
"My own personal feeling is that we're not at the bottom yet," said former Aetna Inc. Chief Executive Officer William Donaldson. "Monday was the beginning of a bottom, but we're not there yet."
"At this point, the stock markets are about greed and fear and emotion. The fundamentals count in the long run, but not in the short run," Lehman Brothers' Applegate said. "I think the U.S. is very, very close to having a true selling climax, a panic day, that will set the stage for a powerful rally that could last weeks or months. Whether it's the final bottom of this bear market is too early to tell."
Former U.S. President Bill Clinton delivered the conference's closing speech. He was of "two minds about whether to come today," he said, "because it's so important for the country to speak with one voice right now" -- that of current President George W. Bush.
After stressing that his remarks came in the context of "what I believe is a unanimous imperative to work with this president and this administration," he offered a few observations on how the U.S. can move on after the attacks.
The country needs to bolster its defenses, he said, through increased security at other possible targets and places of mass transit, and it needs to improve its airline security, including instituting background checks not only on commercial pilots but also on anyone enrolled in flight training. It needs better human military intelligence, and improved methods of enforcing laws against white-collar crimes such as money laundering that fund terrorist activities.
The U.S. also needs better protections against cyberterrorism and the use of technology in planning attacks, Clinton said, citing an editorial his former chief of staff, John Podesta, penned for Wednesday's Washington Post. Podesta calls for expanded U.S. authority to conduct electronic surveillance, including software, e-mail and cable system wiretaps, and for additional funding for the Federal Bureau of Investigation's Technical Support Center.
"The fundamental fact of the 21st century will be global interdependence. ...This can be the most exciting time in all of human history," Clinton said, citing an array of medical and technological advances. "This can be the best time in all of human history, but we have to be wise and tough and determined, and we have to begin with security."