CHICAGO — Diane Swonk, chief economist with Bank One Corp. in Chicago, was in the World Trade Center complex at the time of the terrorist attacks and escaped unharmed but covered in soot. One month after the tragedy, she told National Association of Real Estate Investment Trusts (NAREIT) executives gathered here for an annual conference that the U.S. economy now carries a risk premium.

“Up until Sept. 10, even with all of our economic warts, we were seen as an oasis of prosperity and safety in the world that was unmatched anywhere. After Sept. 11, we have no way of knowing how that thinking has been altered,” Swonk said. “We know it's changing business plans, it's changing public sector plans, and we know it's altering the way we live.”

Nevertheless, Swonk is optimistic that the U.S. economy will learn to adapt and even expand in the face of a heightened terrorist threat, much like economies of the United Kingdom, Israel and Italy have done. Those economies are considered to be far less flexible and adaptable than the U.S. economy, she said.

Grim short-term outlook

Swonk's remarks, delivered the morning of Oct. 12, capped a gloomy, three-day NAREIT conference at the Sheraton Hotel & Towers. The familiar themes of growing funds from operations (FFO) and seizing development opportunities were replaced by panel discussions on terrorism insurance and building security.

Recognizing that the world had been turned upside down on Sept. 11, NAREIT conference organizers were forced to overhaul the program content in the weeks following the terrorist attacks to make it as timely as possible. The grim mood simply reflected the times.

In keeping with the dreary theme, The Bank One economist estimated that for every employee laid off in the airline industry, 16 workers in the tourism industry will lose their jobs. In other words, the layoff of 100,000 workers in the airline industry following the terrorist attack will result in the loss of 1.6 million jobs in the tourism industry in the weeks and months ahead. That temporary loss of jobs and income, combined with the business disruptions caused by the Sept. 11 events, obviously does not bode well for the economy in the short term, she said.

“Do we know how deep the recession will be? No, we don't,” Swonk said. “At the moment, it looks like a relatively shallow recession, according to recession standards.” Swonk expects unemployment to peak at slightly higher than 6% and anticipates some positive growth in the economy in first-quarter 2002. Recently released results for the third quarter show that the country's Gross Domestic Product (GDP), the total output of its goods and services, shrank by 0.4 %.

Market reactions

There has been at least one surprising twist to the economy in the weeks following the attack, Swonk noted. Thanks to 0% financing incentives, vehicle sales in the U.S. shot up incredibly in October. In fact, two weeks after Swonk spoke, the auto industry reported that American consumers bought nearly 1.73 million cars and trucks in October, surpassing the record set in September 1986. But some auto analysts argue that the 0% financing incentive is costing auto makers several thousand dollars per car and that it's an ill-advised business model that inevitably will erode profits.

One positive note for commercial real estate is that as a result of Sept. 11, banking institutions now realize they need to establish backup information systems off-site in the event of a crisis. Duplicative applications of technology could cause a resurgence in technology investment in this country, Swonk said.

Reflecting on the tragedy of Sept. 11, Swonk said that on a personal note it's important to remember when you are facing a crisis to shelve your emotions for the moment and keep moving out of harm's way. “I saw far too many people die who didn't do this,” she said. “If you're facing a crisis, keep moving. Don't stop.”