Shifting the blame for a grim outlook

The mind-set created by the myth of a recession-proof new economy proved a disastrous preparation for the sudden sharp downturn in the world economy. Rattled US corporates have been blaming their poor figures on the American terrorist atrocities. Admittedly certain sectors have been hard hit, but none of them had been in rude health before. Nonetheless the outrages will now be a catalyst for further economic deterioration.

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Anthrax attacks add a new level of uncertainty: workers queue for tests in Washington, DC

One of the most reviled figures in the UK today is Jo Moore, a government press adviser in the department of transport, local government and the regions. On September 11, minutes after hijacked aircraft struck the World Trade Centre, the quick-thinking Moore circulated a now infamous email. It suggested that the government seize the moment to publish any bad news, since it would get lost in coverage of the unfolding atrocity. "It's now a very good day to get out anything we want to bury," Moore advised.
She has subsequently been attacked as a symbol of the cynicism of a Labour government obsessed with spin and news management. But it may be that the Moore spirit pervades the private sector as well. Some companies have opportunistically - possibly cynically - used the confusion following September 11 to mask unrelated problems. The question is how widespread those problems were and how painful the downturn created by them will be.
Chuck Hill, research director at financial researchers First Call, notes wryly that more than 60% of the profit warnings issued by companies since September 11 have explicitly blamed the terrorist onslaught. "It accentuated some of the problems already under way but we would have had most of these warnings anyway... there's been some highly questionable stuff," he says. Companies have been trying to persuade analysts that some of the charges they have taken in the third quarter were related to the attacks and not a reflection of old-fashioned poor performance, he remarks.
Few accountants were surprised, therefore, when the US Financial Accounting Standards Board eventually ruled against allowing firms to treat losses connected to the terrorist attacks as an extraordinary item. This meant companies would not be able to separate these losses from the rest of their financial results, which would have invited the more unscrupulous to muddle their true position. In the kind of language that only accountants resort to, the FASB said: "While the events of September were certainly extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case." (There has not, in fact, ever been a case where "extraordinary" treatment has been permitted.)

The US economy was in deep trouble long before terrorist attacks wiped out the heart of New York's financial district.
The new-economy miracle had long been looking like an embarrassing fiction, and the associated US productivity gains of the 1990s, trumpeted by no less a figure than Federal Reserve chairman Alan Greenspan, called into question. Indeed a report by the McKinsey Global Institute last month argued that the IT spending spree had not significantly increased productivity. The dot coms have vanished, the tech bubble has burst and so too has the banking bubble. Where not so many months ago there was a war for talent, Merrill Lynch has offered all employees voluntary redundancy.
The proudest old-economy stalwarts too were limping uncomfortably before the September 11 outrages and anthrax. The consensus forecast for annual US GDP growth was still around 1% but most economists were poised for another set of downward revisions. Business and consumer confidence was dropping at an alarming rate. Five hundred thousand jobs had been lost since March and lay-offs were gathering pace.
Corporate warnings had been pouring over the wires. First Call counted 935 negative pre-announcements in the first quarter alone, by far the highest number since it started keeping records in 1995. The telecoms sector had fallen apart after an orgy of expansion. By the end of August 174 public companies had already filed for Chapter 11 bankruptcy, compared with 176 for the whole of 2000.
Some in business may have been in denial, but the Fed was under no illusion. As the Dow Jones and Nasdaq dived, threatening the much-vaunted wealth effect, Greenspan had already more than halved interest rates since the start of the year in an attempt to prevent the economy plunging into its steepest downturn since the start of the 1990s; and the Bush administration was working towards implementing a massive fiscal stimulus.
US policymakers weren't alone in trying to inject some hope. The Bank of England, despite apparently much more robust domestic conditions in the UK, had been cutting rates. And even the European Central Bank, for so long seemingly oblivious to the mounting economic reality, joined in.
The bioterrorism scares and airliner attacks still had a material impact on certain parts of the economy besides the less measurable confidence effects and the shock to markets. As one rating agency admitted, "What was scary was that no-one knew quite how or why specific industries would be hit". Most immediately, it was the airlines that felt the squeeze.
More than 120,000 job cuts were announced in the two weeks following September 11 as the airlines rushed to adjust to a new business environment. At least another 80,000 are expected in the months ahead. Moody's Investors Service downgraded its ratings for 10 of the major airlines. British Airways, in addition to another round of redundancies, announced it would not be paying an interim dividend for the first time since it was privatized in 1987. And, most spectacularly, blue-chip carrier Swissair was brought to its knees.
These episodes aside, the full scale of the damage inflicted on the US and world economies directly by outrages is hard to disentangle from the continuing slowdown. Part of the problem is the inadequacy of statistical information.
Analysts say airlines were already in a mess and headed for major restructuring and consolidation. "They operate on such thin margins. Slumping demand one year can wipe out profits and revenues were already coming down," says Stephen Furlong, an airlines analyst at Davy Stockbrokers. "It's just accelerated what was going to happen anyway." The core problem is chronic oversupply. There are too many flag carriers, a throwback to the Cold War when governments felt there was a strategic reason to have a national airline, he adds.
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Shifting the blame for a grim outlook

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