Within days of September 11, John Strahinich, editor of the monthly magazine Boston Business Forward, ordered up a cover package on how the war against terrorism would affect the regional economy. But as soon as the stories came in, Strahinich detected a problem: it was clear to him that everyone was groping in the dark.
"These were good reporters talking to smart people. I was reading all their stories, and I was saying to myself, ‘You’re full of shit,’" he recalls. "Nobody knows what’s going to come down next month, never mind next year."
As it turned out, those articles were never published. Last week, the magazine was shut down after just four issues. The reason, Strahinich says, was simple: what had been a difficult business environment became impossible after September 11. "What did us in was obvious — not enough ads," he says. As for what he’ll do next, Strahinich — a veteran journalist and former executive editor of Boston magazine — says, "I have no idea."
Welcome to the New New Economy. Already cloudy after the collapse of the dot-coms, the economic climate took a decided turn for the worse on September 11. During the giddy times of the late 1990s, it was often said — sometimes by people who should have known better — that the business cycle had been repealed. Well, it’s back, fueled not just by garden-variety economic factors but by terrorism and rumors of terrorism at home and an uncertain war abroad.
Consumer confidence is down. Unemployment, though still modest, is rising. In Greater Boston, a chill has come over the once-white-hot rental markets for housing and office space. And no one has any idea of how much worse things are likely to get.
"We’ve never experienced anything like this, so that’s why there’s so much uncertainty out there as to what the future is going to hold," says Jim Brett, president and CEO of the New England Council, a business group.
Adds former governor Michael Dukakis, who urges state officials to postpone a voter-approved income-tax cut: "It’s so hard to tell, because this thing that began on the 11th of September is so hard to analyze. There is this continued uncertainty, and that’s difficult for everybody. You just have to hunker down and do the very best you can."
At a time of high anxiety and wavering expectations, it’s only natural to look for signs that maybe things won’t get that bad. Trouble is, anecdotal evidence can be about as useful as examining the entrails of slaughtered animals in figuring out where the economy is going.
Peter Meade, executive vice-president of Blue Cross and Blue Shield of Massachusetts and a long-time observer of the political and economic scenes, tells a story that may or may not have a larger meaning. Last weekend, he says, he asked a hotel operator in Nantucket, "So how’s business?" The reply: "Fantastic." Apparently the loss of European guests had been offset by visits from New Englanders who’d decided to vacation close to home. Proof that the recession may be mild? Hardly. But a hopeful sign for a regional economy that’s heavily dependent on showing off its sights and charms. "For us," says Meade, "the tourism business is huge."
The entrails were particularly hard to read on Newbury Street last week. On a perfect fall day, the lunchtime crowd at a chic, mid-priced eatery was large, but not overflowing. When I asked a waiter how business had been, he told me it had been devastated by the terrorist attacks — but "a couple weeks after that, business was back up again."
After lunch, as I walked toward Mass Ave, Newbury appeared to be hopping. But was anyone buying? A few empty storefronts here and there suggested hard times — but stores are always turning over. Maybe there were just as many "For Rent" signs one year, two years, three years ago, except that no one noticed.
Economics-by-anecdote is limited by the first contradictory anecdote that comes along. Which is why there is no substitute for numbers.
Not too many years ago, Route 495 was an exurban highway to nowhere. But during the 1980s and especially the ’90s, 495 — particularly the stretch north and west of Boston — became what Route 128 had been a decade or two earlier: a vibrant center of hot technology companies that drove much of the region’s economy.
It’s Tuesday, October 30, and several dozen economists and businesspeople have come together in the heart of the 495 zone to dissect the national and regional economy. The gathering spot is emblematic of their surroundings: a newish, nondescript hotel in a Westborough office park whose thoroughfares bear names such as Computer Drive and Research Drive. Next door is the headquarters of EMC, the once-glamorous data-storage company whose stock price has fallen from about $100 last year to $12.01 at the close of business on Tuesday. Across Route 9, at another office park, an enormous, empty edifice of brick and glass rises above an equally empty parking lot. But not all the signs are negative, not by any means. Traffic during the morning commute is still heavy, and cars slow to a crawl at exit ramps up and down 495.
The conference is sponsored by the New England Economic Council, and the star speaker is Mark Zandi, the thin, studious, much-quoted chief economist of a Pennsylvania firm called Economy.com. The terrorist attacks, Zandi tells us, undermined an economy that was already struggling. Retail is getting hammered, and the dollar volume of Christmas shopping this year could be less than that of the previous year for the first time since 1953. Increased spending on security and defense will be a drag on productivity growth. Some 1.3 million people lost their jobs this year through September, with about 350,000 of those layoffs coming after September 11. "I think there’s no doubt at this point that the economy is in a full-blown, self-reinforcing recession that at this point is evolving very rapidly," Zandi says.
Yet, despite that negative assessment, Zandi is also optimistic. He predicts that the national economy will begin to recover during the first quarter of 2002, and that New England’s economy will pick up in the second quarter. The reasons: energy prices have dropped; the Federal Reserve has moved aggressively to lower interest rates; and the federal government is stimulating the economy with tax cuts and emergency spending — some $100 billion so far, with perhaps another $75 billion to come. "The foundations for a turnaround are coming into place," Zandi says.
Other speakers, though, are skeptical, and several suggest that Zandi’s projections amount to little more than a best-case scenario. The reason for their pessimism is the nature of the current predicament, which, even without September 11, would be unusual in the annals of modern economics.
In the past, recessions have been the inevitable consequence of inflation. The economy overheats, the Fed raises interest rates, unemployment rises, and inflation falls; after that, the cycle starts all over again. By contrast, the current recession was caused by a precipitous decline in business investment. In the late 1990s, with inflation in check despite strong economic growth, the Fed kept interest rates low, which provided businesses with an incentive to go on a spending binge, much of it on information technology. At some point, they became sated — and when the tech-stock bubble burst in the spring of 2000, capital spending ground to a halt. Since then, the Fed has furiously been cutting interest rates in order to prop up consumer spending and housing sales, and those two areas have held up remarkably well. But as Christopher Probyn, chief international economist for State Street Corporation, told those attending the conference, the Fed had merely "alleviated the symptoms" by making it easy for consumers to keep spending. The disease, he explained, will be cured only when business investment resumes — and there are no indications that that will happen anytime soon.
The worst-case scenarios are grim indeed. New York Times columnist Paul Krugman, an economist at Princeton University, recently wrote a long essay for the Times Magazine warning that current conditions could conceivably lead to a Japanese-style "liquidity crisis" — that is, corporate executives may see no reason to buy equipment and other capital items even if interest rates fall to zero. The Economist sounded a similar theme last week, warning that those who predict a mild recession may be "too complacent" because "the root cause of this recession is not terrorism, but rather the economic and financial imbalances that built up during the 1990s." To wit: overinvestment by business, household debt, and continued stagnation in Japan and Europe.
"It is surely wishful thinking to hope that the bursting of one of the biggest financial bubbles in history, combined with the aftershocks from the most serious attack ever on America’s soil, will be followed by the mildest recession in history," the Economist warned.
