How Sure Is a Soft Landing?

Over the past 18 months or so, the U.S. has experienced the headiness of a boom followed by the sluggishness of an investment bust. Now, as the country heads into the second half of 2001, the growing consensus among many economic and market forecasters is a return to normalcy after a second-quarter slowdown. That means moderate growth, in both the economy and the stock market.

What does moderate mean? According to BusinessWeek's survey of leading economic forecasters, growth over the next four quarters should average just under 3%. That's below the 3.5% growth rate that many economists now believe the U.S. can sustain over the long run. Nevertheless, it would still be quite a decent expansion. Similarly, there's a sense among market analysts that the stock market, now down 8% since the end of 2000, will stage a moderate recovery in the second half of the year.

The factors favoring this New Economy-style soft landing include a combination of good monetary and fiscal policy and a resilient economy. Since January, the Federal Reserve has moved aggressively to stimulate the economy by cutting interest rates. Equally important, Fed Chairman Alan Greenspan is clearly intent on providing enough liquidity to buttress the financial system against shocks such as the ongoing massive write-downs of telecom assets. Meanwhile, consumer spending has stayed surprisingly strong, helped by the rate cuts, low unemployment, the prospect of tax rebate checks, and the continuing faith of Americans in the future of the U.S. economy. Indeed, both housing construction and auto sales are still at high levels, despite the slowdown.

But notwithstanding the forecasting consensus, it's essential to remember that the recovery is still an iffy proposition. First, the near-collapse of telecom spending threatens to pull down the whole tech sector, which until recently was the most dynamic part of the economy. That makes it unlikely that capital spending will revive anytime soon. At the same time, there is increasing evidence that growth is slowing overseas, which will hold down U.S. exports. Japan may already be in recession, and Europe may follow. Industrial production is dropping there, and on June 18 the economics minister of Germany said that his country's growth could very well be zero in the second quarter. With exports and business investment on the sidelines, that means that housing and consumer spending will have to bear the full brunt of powering the recovery--but there's some doubt about how much faster these sectors can grow.

The idea of a moderate recovery may be comforting. But since the middle of the 1990s, the New Economy has shown its ability to surprise, both on the upside and the downside. It could very well happen again.

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