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DECEMBER 29, 2003
It Was A Year Of Turnarounds And (Mostly) Welcome Surprises The surprising finale to 2003 -- the double wowie of capturing Saddam Hussein just as the Dow Jones industrial average surged past 10,000 -- is in perfect keeping with a year full of surprises. In January, America was facing an annus horribilis mired in a weak, jobless recovery and worry over a war in the Middle East. By December, the annus had turned mirabilis, with the economy powering ahead and prospects for Iraq improving. No one could have predicted this and, as an army of prognosticators assembles to tell us what will happen in 2004, it may be wise to take a moment to consider all the unexpected events of the previous 12 months. Even the most thoughtful forecasts (including BusinessWeek's current issue, "Where to Invest in 2004") cannot fully take into account the wild swings of the business cycle, the rise and fall of nations, or the foibles of politicians. Here are some of the biggest surprises of 2003: Washington started the year talking about fiscal stimulus to help the economy -- and ended it with fiscal folly that could harm it. Who would have thought that a Republican White House and Congress, the first since 1954, would go on a spending spree? Higher defense outlays to combat terrorism are one thing, but billions for farm subsidies and pork legislation, plus trillions for Medicare drug benefits, on top of huge tax cuts? In 2003, conservatives lost their way. The U.S. started the year afraid of China's growing economic power and ended the year scared silly of India. China was blamed for the jobless recovery by luring Corporate America with a siren song of lower costs. Early in the year, there was a cry that "offshoring" was gutting America's manufacturing jobs. By December, however, U.S. industrial production had posted its biggest jump in four years, and companies were hiring again. And India, not China, was becoming the bad guy. The talk was of high-tech corporations transferring software writing, engineering, and all kinds of service jobs to Bangalore, threatening America's future. And China? By yearend, it was increasingly seen as a global engine of growth, importing goods from all nations -- and buying lots of U.S. Treasury bonds as well. The U.S. economy's remarkable strength, of course, may be the most unexpected development of the year. Last December, few economists predicted the year's huge swell in corporate profits, the jump in capital spending, and the rocketing stock market. The third quarter's 8.2% rate of growth was a shocker. Information technology made an unexpected rebound when chief executives poured billions into productivity-enhancing software and computers. And for the first time in a decade, the whole world started growing in synchrony. The U.S. began 2003 worrying about deflation and ended the year fretting over inflation. True, the core Consumer Price Index for November fell, but the drop was probably a fluke. The talk in the markets remains inflation, and perhaps for good reason. The falling dollar pushed up import prices, while huge Chinese imports of oil (another surprise: oil prices did not fall in 2003), steel, and commodities sent prices higher. China's deflation turned into inflation, and prices there are now rising at 3% annually. Will U.S. inflation follow? A year that began with the worst state and local government fiscal crises in 50 years ended with those governments' budgets moving into the black. Higher personal incomes, a rising stock market, and tax increases generated a lot more tax revenue than anyone would have guessed. In California, tax collections exceeded forecasts by $500 million in the first quarter of its fiscal year. That was a nice surprise for incoming Governor Arnold Schwarzenegger. As for Washington, an awful fiscal 2003 deficit turned out to be merely bad -- $375 billion rather than $450 billion. This passes for good news in a town that has no fiscal discipline and accepts a federal budget deficit that will reach $5 trillion to $6 trillion over the next 10 years, even before the Medicare drug benefit kicks in in 2006. There were plenty of other surprises in 2003. The ethical rot of highly paid professionals proved even deeper than imagined, with a mutual-fund scandal following scandals in Corporate America and on Wall Street. Howard Dean road the Internet out of Vermont to lead Democratic Presidential candidates. A conservative Supreme Court came out in favor of gay unions, affirmative action, and campaign-finance reform. Wi-Fi, plasma TVs, and camera cell phones got hot. And perhaps the biggest surprise of all in 2003: The Florida Marlins beat the New York Yankees to win the World Series. What a year! It shows that anything could happen in 2004. 
BW MALL
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