This Time It's Different

The

latest poster child for dotcom misery, in case you're still keeping score at home, is eToys. Since the Grinch stole its Christmas season, it has been hunting for a buyer or a merger partner--anything to avoid bankruptcy. Employees are bracing for layoffs as the site unloads toys like Sing 'N Strum Barneys and Talking Wimzies for as much as 75% off. And the stock? Down from a 52-week high of $31.50 to about 20[cents]. Some folks have been taking perverse pleasure in seeing the dotcoms crash and burn. "Is anyone else morbidly watching this stock like you stare at a car wreck when driving by?" a posting on Yahoo's finance message board asked last week. But watching economic distress has suddenly become a lot less fun.

That's because the distress is no longer confined to young dotcommers who got rich fast and lorded it over the rest of us. And it's no longer confined to the stock market. The economic uprising that rocked eToys, Priceline.com, Pets.com and all the other www.s has now spread to blue-chip tech companies and Old Economy stalwarts. Now it's Microsoft warning, for the first time in more than a decade, that quarterly earnings will lag behind estimates. It's Union Pacific railroad announcing that 2,000 employees will be involuntarily disembarking. It's steelmaker LTV filing for bankruptcy for the second time in 14 years. It's Montgomery Ward announcing that it is ending 128 years of American retailing history by closing its 250 stores and pink-slipping its 37,000 employees.

If all the news were this grim, at least we'd know where we stand: just haul out the dreaded R word. But our current economic plight isn't (at least yet) as simple as the two quarters of negative economic growth that define a recession. Instead, the indicators are like a glitchy traffic light, flashing red and green and yellow at the same time. The NASDAQ has plunged a portfolio-punishing 50% from its highs in March. But the Labor Department announced last week that new claims for state unemployment insurance were down sharply last month. The Conference Board's Consumer Confidence Index fell for the third consecutive month, to its lowest level in two years. But the National Association of Realtors reported on the same day that sales of existing homes rose 4.4%, to the highest level since August. The vaunted New Economy may not have suspended the business cycle, as some of its cheerleaders predicted, but it is definitely giving us a new kind of slowdown.

In the latest quarter for which results are in--the one that ended in September--the economy expanded at a 2.2% annual rate, a steep drop from the 5.2% annualized rate of the first half of 2000. Economists at J.P. Morgan Chase predicted last week that growth in the first half of next year would drop to less than 1%. And a few experts even predicted recession.

There are clearly some old-style brakes at work, including rising energy prices, interest rates and debt burdens, all of which take money out of consumers' pockets. But we're also seeing several new wrinkles, like the way the beaten-up NASDAQ appears to be pulling the economy down rather than the other way around. However shallow or deep this downturn proves to be, it is unfolding according to a fresh set of New Economy rules. Among them:

No. 1: What Goes Up Fast Can Come Down Even Faster
Financial pundits liked to refer to the recent expansion as the Goldilocks economy: everything from jobs to inflation was just right. But they could just as easily have named it for Lake Wobegon. For a while, investors acted as if every stock was above average. And companies that were in favor were wildly in favor. Just how giddy was it? Remember the name of 1999's buzzy, fast-selling financial Bible? Dow 36,000.

The risk in New Economy investors' enthusiasm is that at the height of the market, every possible piece of good news is factored in. Then when companies whose stock sells at sky-high multiples of their earnings announce even minor setbacks, their stock gets pummeled. Last month networking powerhouse Cisco Systems announced it was setting aside $275 million in a rainy-day fund to cover missed payments from failed customers. Wall Street's reaction was a punishing 12% drop.

In Old Economy days, the stock market was a source of stability. Wealthy old men would read the listings in the morning paper and learn that their shares had swung up 1/4 or down 1/8. Today we have the Internet and the "CNBC effect." People see a trend as it's happening and call or click their broker to chase the momentum. High volatility on the upside is fun; it's nice to see that a stock you bought on Tuesday is worth 30% more on Thursday. But on the downside, it can turn a minor downtick into a major bloodbath. And that's one reason why for the NASDAQ the year 2000 was the worst in its 29-year history.

No. 2: Wall Street and Main Street Now Intersect
The stock market has long acted to discount predictions about the future of the economy--and it still performs that role. But today the market's fortunes also influence the performance of the economy to a greater extent than ever. It now helps determine how many toys and cars America is willing to buy.