Not since the 1920s has the U.S. seen a business cycle driven by investment, rather than consumer spending. In the '90s, corporations spent billions on information technology to boost productivity. Globalization opened up fresh sources of capital, goods, and labor. The Internet promised whole new ways of doing business. And the stock market became the financial engine pulling the economy along at an ever-faster speed. When the high-tech bubble burst, it revealed silly dot-com business models and ridiculous high-tech stock market valuations. Surprising to the last, the '90s business cycle ended only when a terrorist attack cracked consumer confidence. Had it not been for September 11, the NBER believes the U.S. might even have skirted the recession.
Whenever recovery comes, be it next spring or sooner, it appears likely that the Old Economy will rebound before the New. Overcapacity in high tech is a key, albeit temporary, legacy of the last decade. It may take until 2003 to work off the remaining excess in telecom, personal computers, and chips. But manufacturers in autos, chemicals, engines, and paper restrained themselves in the '90s. As consumers do their Christmas shopping and run down inventory, manufacturing production is poised to rev up anew and lead the recovery.
Higher productivity is perhaps the most enduring legacy of the last business cycle. Productivity growth has continued to be strong right through the downturn, suggesting that the improvement in the '90s was not a figment of the boom years but a return to the economy's historic norm of about 2% per year. Continuing at this rate should allow corporations to rebuild their bottom lines faster than during previous recoveries in the '70s and '80s, when productivity was growing at only 1.4% a year. It should also permit a 3% increase in yearly gross domestic product without triggering inflation--not the red-hot growth of the boom years but solid enough for substantial increases in equity prices.
Geopolitics may provide the greatest uncertainty for the recovery ahead. National security played virtually no role in the economy of the '90s. Now it does. Security will define the level of consumer confidence and the direction of globalization. It could influence international capital flows. It will certainly increase the role of government in the economy.
The U.S. economy, on balance, performed remarkably well over the course of the '90s business cycle. At this point, no one can tell exactly when the next cycle of recovery and expansion will start, or how strong it will be. Our guess is that given the legacies of the past, it will initially be fairly moderate. Measured against 2001, that is progress.