It was all going so well.
Joblessness was at its lowest level in 30 years. Prices were in check. Productivity had surged to levels not seen since the 1960s. Early last year the economy was on a luxury cruise ordering umbrella drinks. Conditions seemed so perfect that a new, more cocky breed of economist was arguing that the New Economy had changed history. Recession? A relic. Despite falling stock prices, this optimism continued into autumn, with one prestigious group of business economists predicting "solid growth ahead with no end to the expansion."
And then it happened. After the economy roared at a 6% rate of growth for the 12 months ending last June, economic pundits looked on in horror as it all began to cave in right before their eyes, with the economy edging close to zero growth. Imagine being in a speedboat going 60 m.p.h. and suddenly hitting a sandbar. It was a rude awakening. New Economy or not, the business cycle turns out to be alive and well. And hungry.
"We entered a hard landing sometime last summer," says Allen Sinai, chief global economist for Decision Economics. "And we are in at least a hard landing now. The odds are pretty high that we could end up in a full-fledged recession." Sinai sounded the alarm early last year, but most forecasters were blindsided by the speed with which the economy deteriorated. And they took us down with them.
Why did they blow it so badly? How did they run through the STOP signs? And could we have gleaned something they didn't in the months leading up to the slowdown? Here are some of the turning points that ultimately led business activity on a downward spiral.
LONG IN THE TOOTH
This expansion was overripe for a downturn. For a half-century the natural business cycle followed roughly the same pattern: three to four years of solid growth followed by a one-year recession. Amazingly, the current economy had been chugging along for 10 years with little evidence of tiring. In March 2000 the expansion officially earned the distinction as the longest in U.S. history. That in itself should have kept us on alert.
But the ebullience that followed distracted many experts from recognizing that the seeds of the downturn had been planted.
"If there's a surprise, it's really that we're going to see the economy slow in the middle of the year, but then I think we're going to see a big reacceleration in the second half [of 2000], and we're going to end the year very strongly, just as we ended 1999." --Gail Fosler, chief economist, The Conference Board (on CNNFN's Moneyline, Jan. 3, 2000)
WALL STREET'S WARNING
The stock market has always been a terrific leading indicator of the health of the economy. Though some experts like to poke fun at how Wall Street has successfully predicted eight of the past five recessions, anyone who ignored the market's warning last spring didn't chuckle for long. What followed offered the most telling demonstration of the market's predictive value.