A Look Back, A Look Ahead

If "surprise is the greatest gift that life can grant us," as Boris Pasternak said, then most Americans led a very rich life in 2000. Of course, nothing signifies this more than the incredible Presidential election with its unsettling twists and turns. But the economy was also full of surprises. No one could have foreseen events at the beginning of 2000 as they unfolded. As economic forecasters peer into 2001, it might be wise to remember that in times of fast technological and social change, uncertainty becomes the norm and the outcome almost always is a surprise.

Here are BUSINESS WEEK's picks for the most surprising surprises of 2000:

-- OPEC wins. Oil prices rise higher and faster, persist longer, and have a deeper impact on growth than anyone anticipates. What happened? Asia recovers from its financial crisis, Americans buy even more sport-utility vehicles, and park them in front of even bigger houses--and Mexico sides with the OPEC hawks in hiking prices.

-- The Nasdaq implodes. Investors decide that the emperor has no clothes and that the business models of most dot-coms aren't going to be profitable anytime soon. Big-cap high-tech companies, especially telecoms, get clobbered, too. The Nasdaq drops over 50% from its peak and drags South Korea's Kosdaq down 80% and Japan's Jasdaq down 60%. Venture capitalists retreat. Experimentation goes out as valuation comes back in favor among investors.

-- Bricks triumph over clicks. Brick-and-mortar behemoths adapt to the Internet faster than Clayton M. Christensen (The Innovator's Dilemma) and other business pundits predict. Tech-savvy bricks clobber capital-starved clicks, who succumb to terminal burn-rate disease. Hundreds of dot-coms die.

-- The euro bombs. The currency that Europe had hoped would triumph over the dollar tanks faster, drops lower, slams U.S. corporate profits harder, and hurts foreign investors worse than anyone predicts. What happened? The U.S. grows faster than Europe and William Duisenberg turns in a dismal performance as head of the new European Central Bank. European financial leaders deceive themselves into pricing the euro at $1.17. It has come off the floor, but the market thinks it's worth much less.

-- Japan leapfrogs the U.S. and Europe onto the mobile Web. Given up for dead technologically, Japan's NTT DoCoMo puts millions of consumers directly onto the Internet. With no dial up, they are on 24/7. Europe's WAP mobile Web technology fails miserably. The U.S. falls behind, to No. 3. So much for America's high-tech triumphalism.

-- Productivity growth stays higher and lasts longer into the expansion than into any other expansion since the '60s. Nonfinancial corporate productivity, Federal Reserve Chairman Alan Greenspan's favorite measure, expands at a 4.9% annual clip in the third quarter of the year. Overall productivity grows at a 3.3% rate, despite a third-quarter slowdown to 2.2% growth in gross domestic product.

-- New Economy growth nosedives sharply and scarily. After a year and a half in which six turns of the monetary screws don't have much impact, it all comes together: high interest rates, high oil prices, a tech wreck on Wall Street, and anxiety over a Presidential election gone bad. The steepness and speed of the decline are a major surprise.

The sudden slowdown is finally bringing realism to naive boosters of the New Economy--and reminding those who forgot that business cycles never die, they just change shape. BUSINESS WEEK has warned for some time that the New Economy is new economic territory and, just as there were surprises on the upside of the cycle, there would be surprises on the downside. The U.S. hasn't seen such high-tech, capital investment-driven economic growth for nearly four decades. It was bound to astonish. It has--and will.

In the spirit of knowing full well that most prognosticators have not succeeded in predicting the path of the New Economy, we offer our humble hunches as to a few of the surprises ahead in 2001:

-- A V-shaped economic downturn. The economy could shoot through the soft-landing zone and bottom out at 1% to 2% annual growth. Unemployment could rise faster and higher than anticipated. The good news is that the recovery may come faster, too, as the Fed lowers rates and corporations return to spending money on productivity-enhancing and profit-generating technology.

-- Deflation. It may well replace inflation as the problem for CEOs and policymakers. As growth plummets, price-cutting may well prove to be severe, wage pressures may cool off quickly, and DRAM, personal computers, oil, and other commodity prices might drop. Overcapacity is already a buzzword in high-tech and manufacturing circles. It may get worse.

-- A dollar crisis. As U.S. growth falls, foreigners could start to pull money out of the stock market. The current account deficit, already at record levels, finally begins to weigh heavily on the economy. Certainly, foreign-exchange speculators are likely to test the mettle of the new Bush Administration and see if it truly backs a strong dollar. The dollar is already weakening, and the Euro could soar back to its high of $1.17. At some point, the Fed may face the difficult choice of choosing between raising rates to defend the dollar or lowering them to spur growth.

-- An overseas financial crisis. Watch for trouble abroad as Asia and Latin America adjust to the sharp U.S. downturn and demand for high-tech imports drops. The International Monetary Fund, already busy lending tens of billions to Turkey, Argentina, and other countries, may have to put out bigger fires. That could shock the U.S. financial system--and the dollar.

Our best guess is that productivity growth will continue to be strong and the economy will return to 3% to 4% growth annually by yearend. But there will probably be a lot of surprises throughout 2001.

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