The devil's in the details of the new U.S. economy

The devil's in the details of the new U.S. economy
Advocates of the "new economy" say the traditional economic cycle has been broken. There will be no more recessions. The combination of baby boomer money and new technologies will create long-term growth, as the Dow climbs to unexpected heights.

Much gives credence to those claims. In March, U.S. economic expansion entered its 108th month-a record. Most economists expect the positive trends to continue, with 2000's real GDP growth forecast at more than 3 percent, and with inflation and unemployment remaining low. An improved picture of large federal surpluses reinforces the optimism.

Still, savings are low; debt levels, personal and private, continue to expand; and the stock market is a national pastime. It's estimated that the combined debt of U.S. households and companies ended 1999 at a record 132 percent of GDP. Borrowing has financed high-tech investment and share buy-backs. In 1998 and '99, nonfinancial corporations increased their debts by $900 billion. Moreover, climbing interest rates will increase the strain on debt repayment capacity.

All this can continue if confidence stays high. And a growing U.S. economy is good-to a point. It absorbs Asian and Latin American exports, for example, helping those regions climb out of recession. But those imports were financed by savings: In 1999, the United States had the second lowest level of household savings as a percentage of disposable income in the G7 countries, at 2.5 percent.

The boom mentality is also a concern. Internet businesses are cashing out or giving wealth back to shareholders, not enhancing corporate development. As Richard Burnes, co-founder of Charles River Ventures, noted in The Red Herring: "A lot of thinking these days is much too oriented toward money and cashing out rather than building a strong organization with good people, good products and a defensible strategy."

Silicon Valley's engineers built the Internet's first companies, but a new breed seeking quick stock market fortunes has replaced them. Further, as new Internet companies issue stock, the shares are no longer bought by venture capitalists but by small investors willing to assume high risk. When the economy hits a recession and the bubble bursts, those investors will be the most vulnerable.

The clarion call of the new economy and the related stock market boom must be cautiously greeted. In Devil Take the Hindmost: A History of Financial Speculation, Edward Chancellor notes that there have been other claims of a new economy: in England in the 1720s, the U.S. in the late '20s and Japan in the '80s. All those bubbles burst.

History has long sounded a recurring theme of new eras of limitless prosperity. That alluring idea is again in force, and with it lies the danger of the devil's taking the hindmost yet again.

Scott B. MacDonald is Chief Economist at KWR International Inc. (New York).