Terrorist Attacks: The Aftermath


Economic Commentary by Denise A. Harrison

The recent terrorist attacks sent shock waves through the global economy. While hurricanes, tornadoes and other acts of nature often cause economic disruptions; few events will impact the way we do business, as the recent terrorist attacks have. What has changed?

Long-term structural changes

- Airport and airline security measures including sky marshals, enhanced detection equipment and stronger cockpit doors, will raise both the cost and time of air travel
- Firms face increased insurance costs as insurers assess the risk of further terrorist attacks on their bottom line
- The movement of goods and people will increase both in cost and time as security checks increase
- Just-in-time inventory policies will be reevaluated and more slack will be added to the system, which will increase the buffers and inefficiency of the system
- Financial institutions will incur costs as they follow more stringent money laundering reporting requirements
- Postal service will add equipment to eradicate deadly disease from the mail
- Company mail rooms will add security procedures for all types of packages
- Food processing companies will increase monitoring of the food supply to ensure that harmful ingredients are not added as commodity goods are shipped from their source for processing
- Hazardous material purchases and movement will be scrutinized and tracked in more detail, new systems must be put in place to handle this tracking
- Municipalities will mobilize to handle bio-terrorist attacks

The economic costs are offset by those social benefits of reduced risk and increased security; however, they will also offset the productivity gains that allowed the economy to grow with little inflation in the 1990's.

In addition to the changes to the cost of doing business, the attacks brought on an increase in bankruptcies. Many firms declared bankruptcy when the dot.com bubble burst in 2000. Still other firms were able to hang on; at least until September 11th when many saw revenue drop significantly. Midway Airlines over expanded only to see business travel decline in the spring of 2001. This decline in business travel was aggravated by the terrorist attacks causing Midway to go out of business now rather than later. Renaissance Cruises suffered the same fate, as over expansion led to an inability to service debt, which resulted in immediate bankruptcy when cruise travel evaporated directly after the attack.

Prior to the September 11th attacks, economists debated whether or not the economic slow down would turn into a recession. After the attacks, the consensus opinion is recession, defined as two consecutive quarters of negative economic growth. This definition will be met as the 3rd and 4th quarters of 2001 go negative.

With the new overall increase in the cost of doing business what will turn the economy around?

Some good news:

The Federal Reserve cut interest rates throughout 2001 to stimulate the then slowing economy. The effects of this monetary stimulus should fuel growth in 2002. This monetary stimulus combined with tax cuts and increased federal spending will further stimulate growth during the second half of 2002.

While consumer confidence is down due to the terrorist attacks with increased uncertainty, fear of personal safety and significant job loss, there is a silver lining for many individuals: many have refinanced their mortgages at lower rates and continue to benefit from reduced fuel costs. Home ownership reached a record of 68.1% during 2001. As the tax cuts flow into the system consumers will once again fuel the economic turn around.

This recovery should occur late in the second quarter or early in the third quarter of 2002 as the various monetary and fiscal stimulus kicks in. Timing - how will it differ among industries?

Leaders:

Defense
Security
Information (background checks, credit for mortgage refinancing)
Pharmaceutical
Food
Healthcare

Coincident:

Automotive
Housing
Transportation (not airlines)
Entertainment
Paper
Wireless telecommunications

Lagging:

Airline
Aerospace
Telecommunications
Lodging
Technology

What should the senior management team do?

1. Assess the impact of this threat:
a. Should changes be made to disaster recovery plans?
b. Should we change our inventory policy?
c. How should we enhance the safety of our building? Mailroom?
d. Have our insurance costs changed? Will they?
e. Are there any supplier issues?

2. Some sectors of the economy have felt the economic shock more severely than others, some may have benefited - how does this change the market strategy for our core business segments?

3. Within each of these sectors there will be winners and losers. Each senior management team should take the time to review market segments and the winners and losers within each segment. Is your company playing with the winners? Is your company playing with the potential losers? If so, what action should you take? Be sure to assess your credit exposure to the weak players.

4. Has this threat created any opportunities?

This strategy review will position your company to compete given the structural changes in the economy caused by the recent terrorist attacks.

Denise Harrison is a consultant with Center for Simplified Strategic Planning, Inc.
She can be reached via e-mail at harrison@cssp.com.

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