FOOL PLATE SPECIAL
Consumer Confidence Hard to Predict

The collapse of the Twin Towers may send a shock through the economy just as it sent shocks through the streets of lower Manhattan. It's too soon, however, to speculate what impact it might have on consumer confidence, and too easy to say consumers will be frightened into an economic shell. No one knows. In many ways, the economy is just as strong and diverse as New York City itself.

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By Richard McCaffery (TMF Gibson)
September 13, 2001

Joseph Campbell, an American scholar and author, once said you can tell what's important to a civilization by looking at its tallest buildings. From the stone castles of kings and queens in the Middle Ages, to the churches of the Renaissance, to New York City's Twin Towers, a glance at the skyline, he said, informs us about the people living within its walls.

There's truth to this, but it's a mistake to reduce Campbell's statement to its simplest terms: that because the tallest buildings in the United States are financial centers, its people are solely interested in wealth and power.

The 110-story Twin Towers, formerly the fifth-highest buildings in the world, are gone forever, but anyone who watched the film of rescue workers advancing through the ashes of lower Manhattan or racing onto the wounded grounds of the Pentagon, or saw volunteers lining up by the hundreds outside hospitals to donate blood, understands the World Trade Center isn't a monument to wealth, but part of the living fabric of the United States.

We all understand our economy is based upon personal liberty, that this is the cornerstone of our strength, and that Americans will protect their brothers and sisters at any cost, even if the cost is their own lives.

Tuesday's hijackings in no way diminished this understanding. People everywhere become stronger when huddled together, and this is what we saw happening in New York and Washington.

There is now talk of a global recession. The economy, skidding to a standstill over the last year, simply can't withstand a blow to consumer confidence, for it is only the steady drizzle of spending on items such as new houses, cars, and clothes that has prevented the gross domestic product from slipping into negative territory.

An economist from Wells Fargo (NYSE: WFC) went as far as to say that a worldwide recession is highly likely. The truth, however, is that he doesn't know what will happen. You will find as many economists who believe the economic impact of yesterday's terror will be as short-lived as the winds of a hurricane, as those who believe it will be long-lasting. We know the dollar cost of Tuesday's attack will run into the billions, but that doesn't translate, by necessity, into global recession.

What is consumer confidence? It's ironic that in an age when so much of economics has been reduced to mathematics and models that consumer confidence is simply a "measure" of how optimistic people feel. The Economist, in its Guide to Economic Indicators, explains that it's a measure of consumers' confidence about their economic well-being. Its significance, The Economist continues, is as an indication of short-term spending, borrowing, and savings plans.

It's a valuable metric, to be sure. But it's important that consumer confidence, really a measure of retail sales, is viewed as a short-term indicator. The stock market looks farther ahead. There is speculation that investors will panic when the markets reopen, sending the prices of securities plummeting. We saw some of this in foreign markets Tuesday when, for example, Japan's Nikkei index fell to its lowest level in 17 years before rebounding.

The markets may fall. They may not. I have no idea. I do know this: If they fall, I'm ready as a buyer if specific opportunities arise, not as a ghoul or profiteer, but as someone lucky enough to live in a country that gives us the opportunity to share in a great wave of economic progress, one that cannot be impeded by a horrific act. America and its business community are strong.

The Twin Towers fell, but many surrounding buildings did not. The World Financial Center complex, which houses the headquarters of financial services firms American Express (NYSE: AXP), Lehman Brothers (NYSE: LEH), and Merrill Lynch (NYSE: MER), still stands. Morgan Stanley (NYSE: MWD), the World Trade Center's largest tenant, is actually headquartered a few blocks away at 1585 Broadway. That building still stands, too. Any successful business understands crisis. Most grew up in it.

The collapse of the Towers may send a shock through the economy just as it sent shocks through the streets of Manhattan, across the Hudson River, and throughout the world, but it's too soon to speculate what impact it might have on consumer confidence, and too easy to say consumers will be frightened into an economic shell. No one knows.

In many ways, the economy is just as strong and diverse as New York City itself. Inflation is low, money is flowing, the dollar remains strong, unemployment is low, interest rates are low and may go lower. That doesn't mean there aren't problems. There are cracks in the walls, but cracks appear often and can be fixed. The foundation is strong.

I saw, perhaps, the first shoots of confidence Wednesday morning on the subway. The metro wasn't crowded, but many people headed resolutely back to work. We looked up as we crossed the Potomac River Bridge to see black smoke still rising from the Pentagon. Traffic on the roads was light but steady.

On the mile walk down King Street to my office, soda, beer, and mail delivery trucks criss-crossed the streets. People snapped up newspapers, busy as ever, and the lights were on at Morgan Stanley's office in Old Town Alexandria.

I do not mean to say that we have moved on or, worse, forgotten: It is too soon for the former to happen and not possible for the latter ever to occur. But we are moving forward, carrying now this terrible loss with us.

Richard McCaffery doesn't own shares in any companies mentioned in this report. The Motley Fool is investors writing for investors.