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Attack Threats Cast Shadow On Forecasts

By Nell Henderson
Washington Post Staff Writer
Tuesday, August 3, 2004; Page E01

It wasn't a surprise that the New York Stock Exchange and other institutions that stand as symbols of capitalism are attractive targets to terrorists.

But the strategic attack plans revealed over the weekend did serve to highlight the asterisk in analysts' forecasts of a strengthening U.S. economy heading into the fall. The continued threat of terrorism contributes to an uncertain future that has made businesses reluctant to commit to long-term investments and has kept oil prices high, both serving as drags on the economy.

New York Gov. George Pataki (R) waves from the podium of the New York Stock Exchange yesterday, where trading took place despite a heightened terror alert. (Daniel Acker -- Bloomberg News)

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Such business caution has been a feature of the economy ever since al Qaeda's Sept. 11, 2001, attacks on the World Trade Center and the Pentagon, said Richard Yamarone, director of economic research at Argus Research Corp. "You can't ignore it," he said. "It's there."

Financial markets largely shrugged off the threats yesterday, with stock and bond prices rising modestly on the first day of trading since the New York and Washington area terror alerts were heightened Sunday. But the news did help hold oil prices at record highs.

Crude oil for delivery in September closed at $43.82 per barrel on the New York Mercantile Exchange yesterday, up two cents from Friday's close. That's the highest price since 1983, when oil futures began trading on the exchange. One of the clearest ways that the fear of terrorism has affected the U.S. economy this year was in May when a terrorist attack in Saudi Arabia caused a spike in oil and gasoline prices. In response, consumers sharply reined in their spending, causing overall economic growth to slow to a 3 percent annual rate in the April-through-June period.

From the perspective of an executive deciding whether to buy equipment or take on more workers in the months ahead, the latest alert may mean, "Let's postpone those plans until some of these clouds dissipate," Yamarone said.

Some economists dismiss concerns that fear of terrorism is still exerting a drag on the economy. William C. Dunkelberg, chief economist for the National Federation of Independent Business, said that small business optimism has been "substantially higher" in the past 18 months than in the final 18 months of the economy's last boom.

And Federal Reserve Chairman Alan Greenspan was generally upbeat in his economic outlook, presented on Capitol Hill last month, predicting that consumer spending will bounce back and the expansion will likely continue to broaden and gain strength during the second half of this year.

But Greenspan also said he believes fear of terrorism is among the forces holding back business investment and hiring.

"I think that the issue of potential terrorism is latent, it's there," Greenspan told members of a congressional committee late last month. "I have no way of making a judgment as to how significant it is. . . . We observe it. We get the same sort of response when we speak to corporate executives that you do."

Greenspan said that normally, at this early point in an expansion, businesses are more confidently and aggressively building plants, buying equipment and adding to their payrolls in anticipation of rising demand.

Instead, for the first time in more than a quarter-century, businesses overall are investing less money in plants, equipment and inventories than they are reaping cash flow.

Meanwhile, he noted as another sign of business caution: Corporate debt markets are "barely moving." Net corporate debt declined in June, which means corporations retired more debt than they took on in new borrowings.

"I think the reasons for that are largely the aftermath of the terrorism, and I still think there are concerns out there," Greenspan said. He added that the corporate scandals that followed the terrorist attacks have also inhibited many executives, "so that there is this sense of a general lack of charging ahead."

Washington Post staff writer Justin Blum contributed to this report.

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