It’s been only two and one-half weeks since America became the target of terrorism. Aside from lost lives and economic damage that continues to mount, consumer confidence took a big punch in the gut. People are afraid to fly despite the increasingly lower airfares and some investors are pulling – what is left of their investments – out of the market. Other markets that support those markets, such as e-commerce airline ticket sales companies and travel agencies – also face the possibility of extinction.
In efforts to boost consumer confidence on the heals of the attacks, Federal Reserve Chairman Alan Greenspan reduced the federal funds rate last week by an additional 50 basis points to 3 percent. This is the eighth such cut since the beginning of this year with an overall 2 ½-point cut to 3 percent. It added $100 billion in liquidity to the financial system to meet the needs of some financial institutions and set up facilities with central banks around the globe to address resources needs of European financial institutions. Experts believe this might lead to other funds rate cuts – possibly as soon as next week – and some experts believe it could go as low as 2 ½ percent by the end of the year.
“The drops in the interest rate will definitely help because it enables businesses to go out and get money cheaper and people can refinance,” said Jane Young, a certified financial planner with Pinnacle Financial Concepts Inc. “It won’t have a big impact until people get over this fear. It might take a few months before people feel OK to move on,” adding that she believes that the Fed will continue its attempt to pump more money into the economy to bolster consumer confidence. “I am really optimistic that the economy will turn around and the consumer will regain confidence. It’s a long-range, cause-and-effect kind of thing.”
It was difficult to fathom the market in third week in September when the markets reopened after a six-day respite. Stock prices plummeted and some businesses were forced to close their doors. The consumer confidence index dropped from 114.0 to 97.6 – its lowest since January 1996 – with fears of a global recession around the bend. The immediate financial impact included an estimate of $20 billion to infrastructure of the twin towers alone. Many of the nation’s major airlines announced a large number of layoffs and industries closely related to it saw a significant decrease in business, such as airport food services and taxi cab services. Security was augmented not only in airports but also in sports stadiums and large corporate buildings.
The estimated loss output due to the terrorist attack to the airline industry, so far, is about $4.8 billion, said Mark Zandi, a writer for Economy.com Inc. The impact on hotels is gauged to be about $4 billion with securities losing $3.9 billion. Communication companies will probably lose about $2.6 billion, followed by restaurants with a $1.9 billion loss.
While Zandi expects U.S. housing starts to decrease from 1.62 million to 1.5 million within one year, the federal funds rate should increase from 3.58 to 3.92. Unemployment is expected to increase from 4.7 million nationwide to 5.5 million during this time and retail sales to increase from $3,181 billion to nearly $3,333 billion.
Since the attack on the United States, the Colorado Springs Regional Building Department hasn’t seen a decrease in the number of permits requested. From Sept. 5 through Sept. 10, the number of single family home permits issued was 80. For the following 15 days, that number was 198. Commercial permits requested were three and eight respectively.
Anything that falls under the category of leisure spending, such as travel, will be hurt in the short run, said Young. Consumers and businesses are not sure what to expect so they are cutting back on recreation and entertainment spending since the possibility of additional layoffs could affect them directly.
Terry Sullivan, president and CEO of the Colorado Springs Convention and Visitors Bureau, has seen a drop in both leisure and business travel spending.
“The travel industry was already coping with the slowing economy,” said Sullivan. “This summer was a not such great summer for Colorado Springs. What happened after the 11th of September can be described as the bottom falling out of the tourism business. I think that many people have come to realize how big an industry tourism is when you begin to see significant airline layoffs (and) the downsizing of travel programs. It affects the entire United States.”
Las Vegas has lost more than $100 million to date, added Sullivan. Colorado Springs’ hospitality industry loss is estimated at $7 million to date. The hotel community is, traditionally, operating at a 77 percent occupancy level during September. October usually drops to a 66 percent level. Sullivan is expecting a 50 percent level for both September and October.
This number has fallen in line with the Antler’s Adams Mark Hotel in downtown Colorado Springs. Robert Parmer, general manager of Antler’s, said he has seen a significant drop in business. About 90 percent of his business comes from conventions and the hotel rooms associated with conventions. About 10 percent is derived from leisure travelers. His hotel has lost more than 50 percent of business through November, he said. Because of this, he has been forced to substantially reduce worker’s hours. The hotel employs about 250 hourly and salaried workers. Full-time, hourly-paid workers now work about 15 hours while staff members now put in a 50- to 60-hour week. Health benefits for part-time employees are still in place. But if the downturn continues, he may not be able to continue those benefits.
An example of a convention attendance nosedive is the recent Symphony Ball held every year at the Antler’s. Last year saw about 400 attendees. This year, less than half – 190 – showed up. So far, the overall impact to the 300-room facility is about $600,000.
“Right now, there’s a lot of apprehension about everything,” said Parmer. “We keep hearing the president say ‘go back to your normal way of life.’ But we’re (the hotel industry) just the first in line. Anytime there has been a recession, the hotel (industry) has been the first one because the first to cut back is travel.”
In the hotel business for 20 years, Parmer hasn’t seen anything similar to the economic situation he now sees. During the Gulf War, he saw a reduction of 500 managers at the Hyatt’s 100 hotels nationwide when he was an employee with the company.
“The impact now is much worse,” he said. “Two weeks ago, we talked about open positions and (how difficult it was to) fill them. Now, there’s not enough work. I’ve never seen anything like this before. … business stopped completely.”
One concern Sullivan has is the lost revenue from taxes. This could affect the city’s economy because 22 percent of revenues comes from people anticipated to be in the Springs in September and October. The city’s economy will probably feel the impact at least throughout 2002 but won’t begin to see it kick in for another three or four months.
One advantage Colorado Springs has over other markets, however, is that it is a heavy drive market destination, said Sullivan. About 80 percent of our visitors drive here from places such as Kansas, Oklahoma and Texas. The convention business our area sees might be more regional. Denver, on the other hand, is driven by the airline industry.
Within the last week, the Bureau has experienced a return to normal inquiry activity, said Sullivan. Before September 11, the CSCVB was averaging 9,000 user sessions per week on its Web site (www.coloradosprings-travel.com) and is now back to that level. The sales departments are back to their projected activity levels and people are making long-term plans for next year.
The CSCVB is also communicating with its 850 members by sending a one-page newsletter with updates. It includes a business report and group cancellations and postponements, among others. Walk-in traffic, said Sulli
van, is comparable to September, 2000 traffic.
“A lot of the American public is comfortable staying home and not traveling to destinations,” said Sullivan. “We’re in a period of uncertainty. The best thing people can do in Colorado is try to go back and spend some time in a Colorado destination.”
“Where the economy is just as strong as before the crisis, what has changed is consumer sentiment,” said Young. “That will hurt the economy. Until confidence goes back up, the short term will have some impacts.”
This will probably result in a decrease in import buying since the European and Asian markets are tied closely to the U.S. markets. Although these countries operate on different cycles, a correlation exists during a crisis, said Young. If the U.S. continues to see an increase in its unemployment rate, it could cause an increase in the European and Asian unemployment rate.
“It’s hard to separate what, precisely, terrorism has had on business,” said Carmon Stiles, director of the Colorado Springs’ Office of International Affairs. “Trade, now, was already predetermined before that event. The deals have already been made. Short-term, I don’t see negative impact to the high tech (industry). Long term is another matter because the people are still cautiously looking at the stock market … less travel … the economy … and whether or not that will result in less exports of American products or not. That question is still out.”
He said he expects local exports to show a slight decrease in all areas, especially the high-technology industry. Large production companies are looking at the Far East for production of components and assemblies. The trend of cost comparison will continue as transportation costs may increase.
Nationally, the government is being more cautious about issuing export licenses on products related to national security such as medical or pharmaceutical products, said Stiles. It is looking at products that might be potential uses for terrorists, especially products from the biomedical field.
“There is always a thin line between ‘can I make something cheaper in China and bring it back or is it just as economical to make it in United States, save transportation and technology (costs), and being able to deliver product faster,'” said Stiles. “All of these issues are hard to separate what to attribute our slower export trade to. They all have some impact.”
The Conference Board, a New York-based group that polls consumer confidence, said the nation was heading into a recession before the attacks on the U.S. The fallout of the attacks, however, pushed it into action early with an increasing number of layoffs and less spending due to the decrease in consumer spending. However, numbers might turn early next year.
“This is a good opportunity to buy rather than sell,” said Young. This is not the time to make sudden decisions, but hang in there and do some dollar-cost averaging with a set amount per month from paychecks, like a 401K.
“If you look at Pearl Harbor (and) the Gulf War, there was a tremendous sell-off ,but the market came back and went up about 13 percent within 4 months after the crisis,” said Young. “Things will normalize over time. The 1990s were the best 10 years we had in the stock market. Crises have historically stimulated the economy. At first, everyone is stunned. But the rebuilding has to take place.”
If the government and military respond swiftly before Thanksgiving and security measures become more stringent, the economic outline as seen by Economy.com Inc. is positive. Travel will increase once again, said the West Chester, Pennsylvania-based research company. Terrorism will probably still exist, but will no longer be listed as a top news items.