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Remember those dire warnings about the Internet bubble? Millions of investors, gripped by a mass speculative mania, had driven dot-com equity valuations to ridiculous, perhaps unprecedented, heights of fancy. When the dot-com bubble burst, the investment Calvinists warned, the market collapse would take both the New and the Old Economy down with it.
Well, it sure looks like the Internet balloon has popped. The Bloomberg Internet index is down 65% year-to-date. Chastened New Economy entrepreneurs are shutting down businesses. Employees at dot-com startups hold worthless stock options. The caffeine-fueled, sleep-under-the-desk, take-no-prisoners, show-me-the-equity culture of Silicon Valley and other high-tech hotspots is coming under withering criticism.
But where is the economic crash? Consider this: The big debate on Wall Street is whether the Fed's yearlong campaign of monetary tightening has successfully slowed the economy. Has growth moderated to an annual rate of around 3%, or is the economy poised to surge back in the second half of the year at a blistering 5%-plus pace?
EXAGGERATED.
Many statistics point to the economy's overall health. The main inflation measures are subdued, with core producer prices up less than 1% the past three months and core consumer prices up a moderate 2%. Oil prices are coming down, and the latest data show almost no evidence of wage pressure. Corporate profits are booming, and the unemployment rate is at 4%. So much for economic Armageddon.
Why didn't the Internet crash take the economy with it? For one thing, the talk about an emotionally driven, vastly overvalued stock market was greatly exaggerated. Yes, investors got wildly enthusiastic about many a dot-com business model or an entrepreneur's virtual vision. But the theory that millions of investors from around the world have been systematically stupid for the past six years is simply untenable. Indeed, the current economic expansion is remarkable not only for its record length but for how rapid high-tech innovation is boosting business efficiency and keeping prices relatively stable.
What's more, the Internet revolution is going mainstream. Yes, eToys, Webvan, E-Loan, Insweb, iVillage, Doubleclick, Amazon.com, and other legendary dot-coms are struggling to retain investor confidence. But entrepreneurs and their venture-capital partners are funding good ideas and seeking out new opportunities all the time.
CAUSE FOR CONCERN.
Perhaps most important, managements at General Electric, Charles Schwab, Wal-Mart, Ford Motor, and other brand-name companies are spending billions restructuring their operations around the World Wide Web. They're not about to lose customers without a fight. Little wonder that new orders for high-tech equipment and components, including computers, communications equipment, and electronic components, are running at record levels, according to Edward Yardeni, chief economist at Deutsche Banc Alex. Brown. High-tech investment accounts for some 22% of all durable-goods orders, more than double the share a decade ago.
Nevertheless, there is a reason for unease even though the stock market isn't a worrisome imbalance in the economy. The concern is the increasingly vulnerable finances of low-income workers as the economic expansion ages. The debt-service burden is particularly concentrated in households earning less than $50,000, according to the 1998 Federal Reserve Survey of Consumer Finance (see table below). And more than 10% of households earning less than $50,000 were more than 60 days late on some kind of debt payment in 1998, according to Mark M. Zandi, chief economist at Dismal Sciences Inc.
The lack of affordable housing and health-care insurance coverage is also a significant drain on low-income finances. If the Fed clamps down too hard on the economy, financial distress could spread rapidly among low-income households.
Still, for now it appears that the Fed has engineered the proverbial soft landing for the economy and that the dot-com highfliers have come down to earth without greatly damaging economic activity.
Debt Burdens Are Highest
Among Low-Income Households
Farrell is contributing economics editor for Business Week. His Sound Money radio commentaries are broadcast on Saturdays in nearly 200 markets nationwide
EDITED BY DOUGLAS HARBRECHT
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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