The U.S. economy during the dot-com bubble and recession

ECONOMICS

The industrial age was an age of giant, mega corporations that were often bogged down by inefficient and outdated distribution, innovation, and production techniques. By contrast, the information age of the past 20 years or so has brought forth a new business form, a fluid congregation of businesses, sometimes highly structured, sometimes amorphous, that come together on the internet to create value for customers and wealth for their shareholders. This phenomenon has been commonly referred to as "digital capital," "information technology revolution," or "new economy." However, as both the Dow Jones Industrial Average and the Nasdaq soared to historic highs and record volatility in just a few short years, a widespread and quite fundamental disagreement emerged concerning whether or not the high-tech boom was nothing more than one huge bubble.

This paper analyzes and examines the present condition of the United States economy. Part II discusses what phase of the business cycle we are in. In Part III, the latest GDP (real and nominal) and how it has changed since 1999 are outlined. Part IV reviews what economists are predicting for the current year. In Part V, three events that have occurred or will soon be resolved that likely will affect the economy in 2003 are discussed.

II. WHAT PHASE OF THE Business CYCLE ARE WE IN?

Business, like all human activities, is a cyclical activity and distinct phases may be recognized. The normal business cycle usually lasts approximately 42-54 months. During this time, business activity goes from the despair of the depths of recession to the euphoria of the peaks of business expansion without end and back again. In this pendulum of activity the main investment vehicles - stocks, bonds and commodities - change in their perceived value. Presently, the United States economy is in a bear market/recession, the exact stage of which is unknown.

Business cycles are generally distinguished by six stages. The first stage of the business cycle is the early part of a recession. Bond yields are down and prices are positive and in a bull market for bonds. Stock prices are down and in a bear market for stocks. Commodity prices are down and are also in a bear market.

In the second stage of the business cycle, the recession is deepening. Bond prices are still in a bull market but their upward momentum is slowing. Stock prices bottom out. This is the start of a bull market for stocks as investors anticipate the end of the recession. Commodity prices continue their bear market.

During the third stage of the business cycle, the recession is ending and the transition into economic expansion is underway. Bonds are in the late stage of their bull market. Stocks are in the accelerating phase of their bull market. Commodities are bottoming out and are beginning the early phase of their bull market.

The fourth stage of the business cycle occurs when business expansion is maturing. Bonds start their bear market. Stocks continue their bull market. Commodities accelerate their bull market.

During the fifth stage of the business cycle, business activity is peaking and some sectors are already showing a decline. Bond prices continue their decline. Stock prices top out and begin the early phase of their bear market. Commodities continue to escalate, sometimes dramatically.

The last stage of the business cycle occurs when business activity is in decline and entering into recession. Bonds are declining but approaching the end of their bear market. Stocks are in relentless decline. Commodities top out and begin their decline.

III. WHAT IS THE LATEST GDP (REAL AND NOMINAL)? HOW HAS THIS CHANGED SINCE 1999?

Gross domestic product ("GDP") is the total market value of all the goods and services produced within the borders of a nation during a specified period. Gross domestic product, and most notably real GDP, is a measure of how economically active a country is. The higher real GDP, the more products we produce during that year.

It measures, therefore, the total or aggregate supply of goods and services, consumer and capital goods, produced in a country during one year. The more we produce, the more goods we enjoy for consumption and production, and typically, the better off we are.

Real GDP measures the actual amounts of goods and services a country produces. By contrast, nominal GDP measures the average value of GDP per individual of a country. For 2002, the latest real GDP is $9,488.6 billion (6.0% annual rate). The most recent nominal GDP is $10,449.8 billion (7.3% annual rate).

The growth in real GDP at the end of the 1990s has been relatively high when compared with the early part of the 1990s. However, during the last two quarters of 2000 and the first three quarters of 2001, the rate of growth of real GDP slowed significantly and the United States economy entered a recession in March of 2001. During the third quarter of 2001, real GDP was actually negative for the first time since 1993.

The Federal Reserve has responded to slowing growth and the recession by reducing the target federal funds rate by 475 basis points (4.75%) from January 2001 to December 2001. The effects of stimulative monetary policy and the resulting low interest rates helped increase consumer spending over the past two quarters, partially responsible for the slight increase in real GDP in the fourth quarter of 2001 and the larger increase in the first quarter of 2002. The price index for GDP increased at a rate of 1.0% during the first quarter of 2002, compared to a decline of 0.1% during the fourth quarter of 2001. It increased at an annual rate of 2.2% for 2001, compared to 2.3% for 2000.

IV. WHAT ARE ECONOMISTS PREDICTING FOR THE CURRENT YEAR?

Accurately predicting how the United States economy will perform in a given year is nearly impossible. However, economists have generally predicted that while the economic slowdown is not over, the end may be in sight. According to most economists, the turnaround is taking longer than expected largely because of faltering confidence among businesses and the lag time needed for interest rate cuts to work through the economy. In addition, the accounting scandals and bankruptcies involving hundreds of dot com companies as well as more well-established businesses such as Enron, Global Crossing, PG&E, and WorldCom have left investors rather jittery. Likewise, unlike years past, there is a glaring absence of any seemingly "revolutionary" technology that is absolutely essential to the majority of consumers. Thus, until the economy starts to recover and more jobs start to be created/re-instituted, it appears that the United States economy may be fairly uncertain.

V. WHAT THREE EVENTS HAVE OCCURRED OR WILL SOON BE RESOLVED

VI. CONCLUSION

Nearly two years have elapsed since the Dow Jones Industrial Average and the Nasdaq began their downward spiral. Whether the decline in the stock markets was due to the bursting of the technology bubble is not entirely clear, particularly since external incidents such as the economic downturn, the terrorist attacks of September 11, 2001, and the ensuing war in Afghanistan have impacted both individuals and the stock markets. In fact, the only thing that is clear is that in their unfettered optimism for the future of Internet technology, investors forgot that dot-com companies will some day have to back up their potential with quantifiable performance such as products which are innovative, low cost, and necessary as well as profitability, either currently existing or attainable within the near future.