The first channel is the direct effects of the structural damage, and the immediate effects of the temporary shutdown of air travel, shopping malls, entertainment venues and the like.

At first glance this seems immense, but comparisons with natural disasters where the damage has been on a similar dollar (though in this case not human) scale, such as the Kobe earthquake in Japan in 1995, or the Los Angeles or San Francisco earthquakes, actually tell us that these "direct" effects generally turn out to be smaller than first thought - partly because property destruction itself doesn't detract from measured gross domestic product, whereas remedial and reconstruction work does add to GDP.

The second, and from a purely economic perspective the most worrying, channel is the impact on consumer confidence. This assumes greater importance because it has been consumer spending (and spending on housing) that has kept the US economy out of recession so far this year while exports, business investment and stock-building have all turned substantially negative. In fact, a crude calculation suggests that GDP, excluding consumer spending and housing, has declined in each of the past four quarters.

If consumer spending falters significantly, or for any length of time, then a recession in the US may be almost inevitable. Whether this happens may depend on how quickly and effectively the US and its allies are able to identify and deal with the perpetrators. If retribution is swift and effective, any adverse effects on confidence may be short and followed by a sharp rebound - as happened in 1991 once it became obvious that the Gulf War would be over almost as soon as it started.

However, if the US has difficulty meting out what ordinary Americans would regard as justice, then a more appropriate parallel may be with the Iran hostage crisis of 1979-80. As may be the case on this occasion, the reaction of ordinary Americans was a mixture of shock and outrage, on the one hand, and frustration and impotence on the other.

In April 1980, after the failure of the Carter Administration's attempt to rescue the hostages, consumer confidence dropped by 25 per cent; and in the June quarter of 1980, consumer spending dropped 2.3 per cent in real terms, and GDP by 2.0 per cent.

Another channel is the impact on the stockmarket and the so-called "wealth effects" flowing from that. The US sharemarket has already fallen by more than 30 per cent since its peak in late March last year. So far the effects of this loss of wealth appear to have been fairly limited, partly because they've been concentrated among upper-income groups (which have the capacity to absorb these losses) and partly because they have been to at least some extent offset by rising house prices.

But another big fall (and the initial reaction of European and Asian markets can't necessarily be taken as a guide to what the US markets will do) could have a bigger impact if it turns out to be of the "straw that breaks the camel's back" variety.

A possible fourth channel is via higher oil prices. Certainly if oil prices were to be sustained at over $US30 per barrel (a possibility if any US military response is not carefully co-ordinated with oil exporting countries) then there would be another damaging shock to the world economy.

However, on the assumption that the Administration gets this aspect "right", OPEC has said it won't restrict oil supplies, and if the global economy slows then that should mean lower demand for oil.

The fate of the US economy over the next few quarters thus rests very much in the hearts and minds of ordinary American households. No-one can be entirely sure how they will react to these awful events but it would be neither unprecedented nor surprising were they to lose some of their confidence, at least for a while.

In that case, it's hard to see how there wouldn't be at least one quarter of negative growth in the US economy. Equally, however, it's impossible to believe that the American people and the American economy won't eventually recover.

While all Americans mourn those lost in Tuesday's tragic events, many are beginning to pick up the pieces and resume their everyday activities. That is even true here in Washington, where children have returned to school.

This rapid return to normalcy must be a huge disappointment to the monsters that committed this act of war. Many have wondered why the terrorists attacked when they did. While there were certainly many considerations, there can be no question that the weakness of the world economy was a consideration.

With the US and world economies hovering near recession, the terrorists likely hoped that their heinous acts would lead to significant economic disruptions, maybe even world depression. On that we can already say, they have failed.

Wall Street, of course, was directly assaulted on Tuesday. But the infrastructure necessary to operate our financial markets is intact, and normal operation will begin by early next week. World markets plummeted on word of the attack but have since bounced back as it became clear that US authorities had regained control of the situation.

In the affected areas, the Federal Government has committed the necessary resources to State and local governments to help them meet their disaster-related expenses. While the clean-up from such a massive disaster will take some time, the impact of the challenge on the normal functioning of the affected areas is diminishing steadily.

For the rest of the country, the most important point is that our transportation system is intact. While we will all be on heightened alert, the normal business of Americans is already resuming. Extra security will undoubtedly lead to some delays at airports but other modes of transportation should be unaffected.

From an economic perspective, it is important to remember that only about 3 per cent of our transportation dollars are spent on air travel. There are ample resources available to make sure that businesses have their orders filled on time.

Our economic infrastructure is in place, and ready to resume normal operation. The last concern, and presumably the greatest hope of the terrorists, is that Americans will be cowed by this aggression and curtail their activities because of fear.

If history is any guide, however, the terrorists have vastly underestimated the courage and character of the American people. Patriotic spirit is as high as it was after Pearl Harbor. And just as we observed then, where markets stabilised quickly, Americans will likely maintain their optimism about our future, and refrain from panic selling in markets. I have even been hearing a steady refrain from friends in the investment community - it would be unpatriotic to sell at a time like this.

Before last Tuesday, lingering fear of recession was the primary concern of most Americans. That has been replaced by a steely determination to find the terrorists (and governments that support them) and punish them severely. Such an emotion is not the kind that sets off panics and ignites economic storms. If a storm is brewing, it is of the military variety.

© This material is subject to copyright and any unauthorised use, copying or mirroring is prohibited.