It has become something of a tradition among practitioners of the dismal science.
As the days grow short and Christmas shoppers engage in their last-minute splurges, economic prognosticators haul out their crystal balls and predict slower growth for the coming year.
Over the past five years, they’ve been proven wrong every time. The year would unfold with an explosion of new economic activity largely driven by technology spending.
This winter’s prediction season has been no different. As the final year of the century wound down, the doomsday crowd sought to turn the technology revolution on its head. A small coterie of analysts suggested a technology bug known as Y2K would send the economy spinning into oblivion once it entered the unmapped terrain of computers contending with dates ending in a mysterious triple-zero.
Companies and people would stockpile, causing growth to falter until those stockpiles got whittled down. The artificial stimulus from fixing computers to recognize the new century and work properly in the new year would disappear, finally triggering a slowdown in technology spending.
Surprise, surprise. It looks like the doomsday crowd got it wrong again.
The economic indicators that poured in during the final month of the year revealed that none of the hoarding and cutbacks took place. Most analysts now acknowledge there is nothing on the horizon to keep the economy from growing not just through January, when this economic expansion becomes the longest in U.S. history, but throughout 2000.
It’s the kind of rosy scenario that every incumbent politician fervently hopes for.
Stockpiling? It didn’t happen.
The most recent figures from the Commerce Department show the ratio of business stockpiles to sales at 1.33, close to the lowest level ever. Manufacturers and retailers continue to deploy advanced computer technologies to whittle down costly inventories. Any buildups for Y2K have been far outweighed by this long-term trend.
Expectations that there would be a post-Y2K meltdown in information technology spending are being scaled back, if not abandoned altogether. While some doomsday addicts, such as Deutsche Bank’s Edward Yardeni, are still forecasting a 70 percent chance of recession because of an information-technology spending slowdown, industry forecasters are predicting continuing exponential growth in this key category of capital investment, which has powered the current boom.
Growth in e-commerce retailing, which tripled in the past year, will continue, and personal computers will find their way into more and more households, albeit at a slower pace. But the booming area of information technology spending in the coming year will be in business-to-business Internet dealings, analysts said.
“Companies have been putting off things and burning a lot of dollars in preparing for Y2K,” said Charles Rutstein, an analyst with Cambridge, Mass.-based Forrester Research Inc. “In the new year, companies will be making real investments in technologies that will actually do some long-term good.”
Industry followers said large, established companies will be opening their own storefronts on the World Wide Web; using the Internet to streamline their supply chain; and connecting with new e-marketplaces, which are auction sites where they can go to do business.
Sites like Chemdex.com (scientific equipment), eSteel.com (spot steel market) and HoustonStreet.com (electricity and natural gas) will become to the business world what Amazon.com, eToys.com and eBay.com are to the retailing world.
In just the past few months, Ford and General Motors announced major moves into on-line car selling. They have also said they will be moving most of their supply-chain activities into the on-line environment.
There’s no doubt that Y2K preparations took a big hit out of many bottom lines. One estimate put Y2K spending nationwide over the past few years above $450 billion.
But now those budgets can be channeled in new directions, analysts said. Information technology spending, which was an estimated $370 billion in 1999, or more than a quarter of all capital spending, will surge another 8 percent next year, said Peter Kastner, chief of research at Aberdeen Group Inc., a Boston-based computer consulting firm. “The absolutely ballistic growth in the next year, indeed, the next three to five years, will be in business-to-business e-commerce,” he said.
Not all sectors of the economy will be going full speed in the new year. Interest-rate sensitive sectors such as housing will get hammered by the Federal Reserve Board, where the grinches who fret about inflation believe the economy is still growing faster than its speed limit. With economic growth close to 5 percent in the second half of 1999, it is an almost foregone conclusion that the Fed will boost interbank lending rates a half-point to 6.0 percent in the first half of next year.
Housing sales and starts have already started to come down, largely because of rising mortgage rates in the wake of the three quarter-point rate increases the Fed ordered last year. The average 30-year fixed-rate mortgage stood at year-end at just a shade under 8 percent, a full 1.25 points higher than its low in October 1998.
But even with that slowdown in some interest-sensitive sectors of the economy, economists are nearly unanimous in their view that recession can be avoided in the millennial year. A recession is defined as two consecutive quarters where there is an absolute decline in economic activity.
A sampling of economists from around the country shows their predictions for economic growth in 2000 range from 2.5 percent to 4 percent, either of which would mark another healthy year.
“Tech spending, which has been a third of growth, will continue,” said Bruce Steinberg, chief economist at Merrill Lynch & Co. “Growth will be strong, up around 4 percent.”
“For the first time in 30 years, real wages are growing at a 3 percent-plus clip,” said Diane Swonk, economist at Bank One Corp., which is officially calling for 2.5 percent growth in the first half of 2000 but expects to be surprised on the upside.
“That means consumer spending can continue growing rapidly, and that is phenomenal this deep into an expansion.”
The only wild card for the new year outlook is the stock market. At current levels, a correction, if not a wholesale collapse, has to be considered a distinct possibility.
But given the nature of the 1999 stock market–there were just as many overall losers for the year as gainers–the fallout from a market correction could be limited.
“A dot-com meltdown could slow computer spending some, but the bulk of information technology spending is still coming from traditional companies moving into e-commerce,” Steinberg said. “We’re still in the midst of one of the most rapid changes in business models in corporate history. You either spend money to get into this sector, or you are toast.”
