The New Economy's New Reality

There's nothing like a bear market to strip away some New Economy illusions. A long economic expansion unfortunately led many to reach conclusions now revealed to be false. There are chief executives, young employees, and investors across America today who are stunned into disbelief because their bedrock assumptions turned out to be wrong. Here are three of the most glaring examples:

-- Information technologies are so important to productivity and profits that corporations will always buy them, in bad times as well as good. Wrong. Many high-tech CEOs were lulled into believing they operated in a world with different rules and outcomes. When dot-coms, telecoms, and others suddenly cut purchases of servers, optical equipment, and IT gear last November, they couldn't believe it. Heads of corporations such as Nortel, Sun, and Cisco continued to forecast earnings growth that, in the end, they couldn't deliver.

-- Labor is so scarce, especially in high tech, that companies would never lay off workers in a downturn. Wrong. Many twentysomethings were lulled into believing they were entitled to six-figure jobs and their pet dog at work. They had attitude. Surprise. As profits fall sharply, companies are cutting back on everything: advertising, travel, capital investments--and employees. Layoff notices are at an all-time high, with high tech especially hacking away 10% here, 10,000 there.

-- Growth is so stable and profitability so strong that the equity-risk premium investors demand over bonds will shrink, sending the Dow to 36,000. Wrong. It turns out that a high-tech-driven expansion may raise productivity, profits, and stock prices, but it also may increase volatility and risk on the downside. That's what tech booms always do. Witness the stock market rout of recent months.

The New Economy has always been about basics: somewhat higher productivity and somewhat higher noninflationary potential economic growth. With the stripping away of illusions, the basics are revealed with even greater clarity.

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