CURRENT EVENTS UPDATE

By FRANK GIBNEY JR.

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?" asked a recent posting on Yahoo’s finance message board. 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 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 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 2001 would drop to less than 1%. And a few even predicted recession.

As the new economy has cooled, there has been a steady drumbeat of layoff announcements. But the remarkable thing is that unemployment has so far stayed strikingly low. While the NASDAQ plunged and growth trailed off last year, the unemployment rate fluctuated between 3.9% and 4.1%. That pales compared with the unemployment rates during Old Economy dark years like 1992 (7.5%) and 1982 (9.7%). And it gives the lie to an Old Economy article of faith—that there was a "natural rate of unemployment" below which the economy could not operate without spurring inflation. The supposed natural rate: just under 6%.

How to account for the strong jobs picture? In part it’s because of the tight labor market of the New Economy. Employers fought hard during the expansion to recruit and retain skilled workers. They are not looking to slash their payrolls unless they think a major recession is coming—because they know how much time and effort went in to building their work forces.

There is also more worker "churning" going on. Employees are losing their jobs for economic reasons, but they’re generally finding new work quickly. The latest rite of the Internet world is the "pink-slip party." Dotcommers go to commiserate—and often come away with new job offers. Job churning makes the economy more efficient: it directs workers to the positions where they are most useful. But it comes at some psychic cost to employees. Workers who shift from job to job do not have the security, or form the same workplace bonds, that corporate longtimers did in the Old Economy.

—TIME, January 8, 2001

Questions
1. What is the "New Economy"? "Old Economy"?

2. The article reports that there has been "a steady drumbeat" of layoffs—yet the unemployment rate has remained strikingly low. How can this be?

3. Select four of the panels below and at left, and explain what each indicates about the economy.

TIME CLASSROOM