Analysts Concerned Terrorist Attacks Could Push Nation Into Full Recession
In the days following the Sept. 11 attacks, economists warned that if the economy was not already in a downturn, it could quickly slip into an unambiguous recession as a result of the ghastly attacks.
The key determinant, analysts say, will be the reaction of American consumers to the tragedies and the resulting confusion and emotional pain, and whether people close their checkbooks or keep spending.
“After the short-term news is digested, I’m afraid that in the medium-term consumer confidence will collapse along with the [World Trade Center] towers,” said Donald Broughton, who follows transportation stocks for A.G. Edwards & Sons in St. Louis. “Before these awful events, consumers were trying to keep spending, but they were skittish. This could really spook consumers.”
In order to reduce immediate stress to the financial system and lessen the recession risk, world monetary authorities moved fast to add liquidity by buying government bonds from banks. The Fed alone pumped in $38.25 billion of funding just on Sept. 12, as global central banks added $80 billion in all, according to the Wall Street Journal.
Even before the attack, the Fed had been contemplating lowering interest rates further to boost the weak economy. Broughton, along with a host of other economic analysts, said the events of last week assure more aggressive rate cutting [Note: Before trading opened on the New York Stock Exchange Monday, the Fed did cut interest rates by 0.5%. Click here for the story.].
While disasters always present a certain array of business opportunities — sales of American flags, for instance, are now extremely brisk — analysts described the general outlook for trucking as a bleak landscape.
They warned of even higher insurance premiums and diesel fuel prices, fewer freight offerings and slower transit times at airports, ocean ports and land borders.
The reaction of consumers is particularly important for the economy, because many businesses, including trucking companies, have been slashing investment spending to save money.
Through the second quarter of this year, consumer spending was the only thing that kept gross domestic product from contracting.
The movement of the entire economy cannot be judged quickly, but two easily identifiable problems for trucking — diesel prices and insurance premiums — could make themselves known in short order. The day after the attack, T-Chek Systems, an automated fuel payment and monitoring company, reported some fuel prices soared by as much as 65 cents a gallon from $1.49, the national average calculated by the Energy Department the day before the attack.
Broughton said panic pricing would quickly subside, but that his firm’s petroleum analysts expect diesel prices to remain high. “When uncertainty enters a market, commodity prices like oil go up, relatively speaking, and stock prices go down,” he said.
While the billions of dollars in insurance claims generated from the trade center bombing are not directly related to trucking, they can be expected to cycle through to motor carriers through policy premiums charged by reinsurance companies. These firms write policies that insure primary insurance companies, and thereby spread risk throughout a larger group.
“It’s a little early to predict the fallout, but it appears to be a significant catastrophic loss,” said Gary W. Miller, chairman of Baldwin & Lyons in Indianapolis, a major insurer of trucking companies. Early reports last week pegged insured costs at $20 billion, which would make it the largest-ever insurance catastrophe.
While most losses will be sustained by reinsurance companies initially, Miller said those costs will eventually be reflected in premiums charged by primary insurers for many types of property-casualty coverage. “I doubt we will see any easing of insurance pricing,” Miller said.
Another insurance industry official, who asked not to be identified, was blunter, saying the disaster would provide an “impetus for higher premiums.”
Truck insurance costs have risen rapidly over the past 18 months, as some of the major underwriters have cut back on discounting in response to unfavorable claims experience and lower-than-expected returns on investments.
If the economy does go into a recession and investment income becomes even more sluggish, then insurance companies could be expected to try and recoup more revenue through premiums.
The World Trade Center buildings alone are valued at $1.2 billion, according to a report in the New York Times. The complex’s owner, the Port Authority of New York and New Jersey, leased the real estate this spring to a private investment group.
The most expensive previous insurance losses in U.S. history have been caused by natural disasters. Hurricane Andrew generated $15.5 billion in claims in 1992. Two years later the Northridge, Calif., earthquake caused $12.5 billion in losses, according to the Wall Street Journal.
In the short term, a few carriers can haul relief supplies related to the attack recovery efforts and eventually building materials for construction projects.
A potential benefit for the broader trucking industry in the aftermath of the attacks is that trucking companies could end up taking business from air cargo carriers, if calls for increased airport security slow cargo as well as passenger flights, as expected.
“There is a potential for airfreight to slow down” for a long period, said Michael R. LaTronica from his midtown Manhattan office. He follows transportation stocks for Morgan, Lewis, Githens & Ahn, an investment banking firm.
“Shippers were already switching to trucks instead of airfreight because of the slowness in the economy. They didn’t want to pay top dollar for airfreight,” LaTronica said.
James J. Valentine of Morgan Stanley Dean Witter concurred that gains for trucking at air carriers’ expense were a possibility, but said he does not think that in the long run they are a major probability.
Robert V. Delaney, a vice president for two logistics providers, thinks air cargo carriers will need to depend more heavily on their computer hardware and software systems if they are to remain competitive.
“The logistics providers will have to use their technology for communication and supply chain visibility to lessen the impact of new security regulations. They’ll need that for better planning,” he said.
Staff Writer Daniel P. Bearth contributed to this report.
This story appears in the Sept. 17 print edition of Transport Topics. Subscribe today.
