In December, most Americans give their financial portfolios a check-up. How did they do this year? Did their stocks and mutual funds grow at least 10 per cent? Did their real estate holdings appreciate in value?
For most of the last decade, the prosperous US economy brought only good news each December, and the toughest decisions were about methods of lessening tax liability on all those profits.
This year is quite different. Few made money in the US stock market, and those who bet on high technology, dotcoms, and the Nasdaq have seen their portfolios sustain huge losses. Interest rates are up, credit is tighter, and the general sense is that hard times are ahead. Economists say the economy is slowing, probably coming in for a landing that will be much harder than anyone, including Federal Reserve Chairman, Mr Alan Greenspan, anticipated. But that is old news to anyone who has been fully invested in the stock market this year.
Indications of a slowing economy and a predictable consumer response are everywhere. Gross domestic product, the sum of all goods and services produced in the US, increased at a 2.7 per cent annual rate in the third quarter after rising at a 5.6 per cent pace in the second quarter, the Commerce Department said. US economic output, about a fourth of the world total, exceeded $10 trillion (€11.2 trillion) for the first time - when measured in dollars at an annual rate.
Third-quarter growth, the slowest since a 2.5 per cent pace in the second quarter of last year, suggests higher borrowing costs engineered over the past year by Federal Reserve policymakers are having an effect.
Corporate earnings are down. So far this quarter, an unprecedented 243 companies have pre-announced their earnings, warning of factors that might affect stock price. Companies such as WorldCom, Sprint, and Aletra are among those 59 percent who have issued negative pre-announcements. Chipmaker Intel has said that weak demand for computers would mean flat or lower revenues in the fourth quarter.
Housing construction has dropped some 4 per cent from 1999 levels. Manufacturing has also slowed. The clearest signs of pessimism began to show up in Christmas retails sales. Americans have been spending money since 1992 as though the good times were here forever. Back then, they saved 9 per cent of their after-tax income. This year, that figure was down to zero.
But change is afoot. Holidays sales are down 7 per cent from the same period last year. Productivity is still strong, inflation is not out of hand, and the existence and growth of the new information, high-technology economy is real. Job growth is slowing, but the labour market is still tight, with a jobless rate of just 3.9 per cent.
While only a minority of economists are speaking the word "recession", the fact is that most agree recession is a real possibility in 2001 if not a probability. Speculation is rampant that the Federal Reserve may actually move to cut interest rates in January, as the threat of recession looms far greater now than inflation. Historically, of course, the US economy is doing fine. The country's top 50 economists told Fortune magazine they expect the economy to grow 3.5 per cent in 2001, and inflation to run at about 2.5 per cent. While those growth rates are considerably lower than in the past few years, they remain historically impressive. And those numbers are similar to the rest of the world. The IMF, in its latest World Economic Report, predicts EU growth in 2001 at 3.3 per cent.
Hopes are high that the resolution of the most bizarre election in US history will help put the markets and the economy back on track. Governor George Bush met on December 19th with Mr Greenspan, and reports were that Mr Bush tried to convince the Fed chairman that his proposed $1.6 trillion dollar across-the-board tax cut would reverse the economic downturn.
It will be a tough sell, as Mr Greenspan has never been an advocate of huge tax cuts. But in managing the end of the most prosperous decade in US history, Mr Greenspan may have to consider a number of options to ease the transition back to normal times.
