The Economy Takes a Breather
November 29, 2000

"What?" gasped Slyvia, when she heard the news. A scant 2.4 percent. Surely there was a mistake. Could the economy have slowed that much?

In 1997, the economy's output of goods and services (or gross domestic product) grew a blistering 4.4 percent. This was followed, in 1998, by an identical performance -- output grew another 4.4 percent. In 1999, with barely a hiccup, the economy continued to sizzle, posting a growth of 4.2 percent.

The U.S. economy continued to expand vigorously in 2000. In the first quarter, GDP grew 4.8%; in the second, it surged ahead by an even more remarkable 5.6%.

But the latest data showed that the economy's advance had slowed. In the third quarter, noted Sylvia, GDP had risen by a distinctly unremarkable 2.4 percent. Consumer spending remained buoyant, as did spending by businesses. Government spending, on the other hand, fell, and so did housing construction. Both exports and imports rose, the latter, though, with greater alacrity, resulting in a sizable trade deficit.

What, wondered Sylvia, may have caused the slowdown in overall economic activity? Could it be -- gulp -- the actions of one Mr. Greenspan?

Since June 1999, Greenspan had raised interest rates six times in an effort to rein in aggregate demand and snuff out inflationary pressures.Clearly, thought Sylvia, the Fed's monetary policy was beginning to be felt, and nowhere as keenly as in the interest-sensitive housing sector which registered a 10.5 percent decline in the third quarter.

Greenspan's image has been tarnished of late. Several investors, especially those dabbling in dotcom stocks, believe that it is his interest-rate hikes that pricked the Nasdaq bubble. With the tech-heavy index down --- percent since January 1, bloodied investors are only too eager to find a culprit -- and the Fed Chairman makes a handy target. But, noted Sylvia, the criticism was largely misplaced: While the rate hikes did indeed cause problems for many dotcoms, their fate was doomed by the adoption of unsound business models and a glaring inability to generate profits.

The falling stockmarket could yet have an unsettling effect on the economy. With their portfolios in disarray, consumers might choose to cut back markedly on their purchases, thus exacerbating the incipient slowdown in economic activity.

But, noted Sylvia, the picture was not all that bleak. As the recent data showed, the economy was still growing at 2.4 percent, which though low in comparison with growth in recent quarters, was eminently respectable for an economy that generates $10 trillion (that is 10 followed by 12 zeroes, or a thousand billion) in goods and services a year.

Furthermore, thought Sylvia in this cheery vein, inflation remains reassuringly docile (3.1 percent), unemployment continues to be astoundingly low (3.9 percent), and budget surpluses mount in Washington. And if the recent performance of the stock market perchance caused some gloom, why, one could turn to the news and delight in the latest labyrinthine twist in the Presidential election.

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