And The Beat Slows Down

It's ba-a-a-ck! The business cycle, that economic beast from 20,000 fathoms, is poking up its head again. The rushing tides of the new economy kept it submerged for almost a decade, but they could not drown it for good. It lives! Only it now looks like a pretty tame beast. A little slower growth in U.S. production, a little more inflation before the slowdown takes effect, a bit more unemployment, eventually, maybe...that's about the worst damage that the cycle is expected to inflict. Unless...

Such was the consensus of TIME's Board of Economists, which gathered in late May in Manhattan to assess a rapidly changing business outlook. For the first time in at least two years, members concurred, not all economic systems are go. Imbalances are showing up, notably a worsening labor shortage and excessive consumer spending; signs of renewed inflation are real; stock markets have turned turbulent, to say the least. Allen Sinai, chief global economist of Primark Decision Economics, long contended that rising productivity in the new economy enables the U.S. to enjoy noninflationary increases in production much greater than once imagined. He now concedes that this picture has been temporarily pushed aside. "For the first time in over a decade," he says, "a standard business-cycle pattern is moving front and center."

Why? Most important, of course, because the Federal Reserve under Chairman Alan Greenspan has been raising interest rates for just short of a year to slow a runaway boom. Members of TIME's board differ considerably on how soon and how hard those rate hikes will bite. But all agree on two predictions: 1) there will indeed be a slowdown; 2) the chance that it will turn into a recession is, in Sinai's word, "zero." Diane Swonk, chief economist of Bank One and president of the National Association for Business Economics, declares, "I expect this expansion to last until 2004"--which is as far as she will predict.

At present there are signs a slowdown may be under way, but the economy's overall momentum is still quite powerful. Total production of goods and services rocketed ahead at an annual rate of 5.4% in the first quarter. That was below the superheated 7.3% pace in the previous three months yet still well above what the wildest optimists would consider a sustainable pace. However, Chris Varvares, president of Macroeconomic Advisers, a consulting firm with headquarters in St. Louis, Mo., expects a "fairly abrupt" slowing in the second half of the year to below 3%, which will hold gross-domestic-product growth for the year to 5%. Ed Yardeni, chief economist of Deutsche Bank, agrees, largely because he believes the skyrocketing rise of stock prices in late 1999 and early this year "most likely did contribute to boosting car sales and housing-related sales." With the NASDAQ index by late May down roughly a third from its March peak, he says, "within the next couple of months we'll find weaker car sales, weaker retail sales, weaker housing activity." Varvares expects a further slowdown to about 2 1/2% growth in 2001, though he thinks the pace will pick up again by next year's end.