Stateline Story

States Watching Economy Closely

Already beset by a slowing national economy and lagging tax collections, states across the country will be watching the economy closely over the next few weeks for signs of fallout from the terrorist attack on the World Trade Center and the Pentagon.

"The question will be what this does to the national economy, because it is the national economy that drives state revenues," said Arturo Perez, senior fiscal analyst for the National Conference of State Legislatures.

Many states were already noting lower-than-expected tax revenues during July and August, the first two months of the fiscal year for most states, said Perez. These were short of already diminished revenue forecasts.

Economists nationwide have said the attacks could shake consumer confidence to the point that the already unsteady U.S. economy could tumble into a recession.

"A full-blown global recession is highly likely," said Sung Won Sohn, chief economist for Wells Fargo & Co. "Recently, the economy has been on a high-wire act, straddling between a recession and anemic growth; the damage to confidence will push us into a recession."

Few others are proffering such dire warnings. Instead, most analysts are taking a more cautious approach, peppering their bleak statements with "could's" and "maybe's" or tying their warnings to a particular sector.

"We've had a manufacturing recession in a number of states. And now it seems to me we're going to have a travel and tourism recession that will affect many other states," said Ray Scheppach, executive director of the National Governors Association.

"The hotel industry is going to have some problems, tourism is going to have trouble, anything travel related is going to struggle for a while. States heavily dependent on that are going to be rather heavily impacted," he said.

Florida is the number one tourist destination in the United States. California is second. Hawaii and New York are tied for third.

Legislative leaders in Florida said Wednesday that the terrorist attacks almost certainly will deepen Florida's budget shortfall and could force even harsher cuts in state programs and services, reports John Kennedy of Ft. Lauderdale's Sun-Sentinel. Officials there are worried that further erosion of tourist spending and consumer confidence would seriously exacerbate the state's budget woes.

The U.S. government has responded quickly to keep the national and world economy afloat. The Federal Reserve said Thursday it was making $50 billion available to European banks working in the United States. Some analysts predict interest rate cuts will follow. Also, a roughly $20 billion relief bill is almost certain to be approved by Congress and signed by President Bush.

The terrorist attacks precipitated immediate economic effects. Just hours after American Airlines Flight 11 crashed into the World Trade Center's north tower, the U.S. dollar plunged in offshore currency markets, oil prices shot up and safe haven investments such as gold climbed. Later, reports of price gouging and $4 gallons of gas sprung up around the country. And Japan's Nikkei stock index plunged 6.6 percent shortly after opening. The sky-high gasoline prices were quickly rolled back.

But it's the long-term effects more than the immediate repercussions that states will be watching most closely.

"Consumers have been holding the economy up. The question is whether this shakes confidence enough," said the NGA's Scheppach.