How We Missed Signs Of A Slowdown

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"Given that we got through the Asian crisis hardly breaking stride, I think $30 oil isn't really a problem." --Joe Kennedy, economist, the Manufacturers' Alliance (Fortune, March 20, 2000)

The Quiet Credit Crunch
In the past three years, the banking industry, perhaps overconfident because of its eight-year string of record earnings, gave lots of money to companies such as telecom start-ups that, in retrospect, shouldn't have been funded so richly. If you had a business card and were breathing, you could have got a loan. By June 2000, total borrowing by nonfinancial U.S. companies stood at $4.6 trillion, up 60% from five years before. Total household debt surged to $7 trillion, up nearly 50% in that time period.

The sand was now running through the hourglass. With the economy turning down in the summer and revenues falling, firms had to dig deeper and deeper into their pockets to service their ious. By winter, four times as many companies had their credit rating downgraded as had it upgraded, the worst such ratio since 1990, according to Moody's Investor Services.

As fears of loan losses began to mount, banks started to put the squeeze on new lending. Venture capital also dried up. The scarcity of new bank loans and venture capital can be deadly for business. There is no faster way to shut down an economy than by denying it credit.

"We used to talk about the Goldilocks economy--not too hot and not too cold. Now it's like the Energizer-bunny economy. It just keeps going and going and going." --David Bowers, professor of banking and finance at Case Western Reserve University (Knight-Ridder Tribune Business Service, March 27, 2000)

There's No Bad News on Wall Street
Finally, when it comes to making predictions of an impending recession, private economists either have no such skills or they just lack the nerve to issue dire warnings. Being the bearer of bad news can be professionally risky, since optimism sells better than pessimism. Government forecasters are also shy about raising red flags on the economy because of the political ramifications. Politicians generally dismiss talk of an economic downturn, preferring instead to highlight prosperity--at least if they want to get re-elected. Asks economist Prakash Loungani at the International Monetary Fund: "How good are these forecasters at predicting the end of a boom? Not very. Only two of the 60 recessions that occurred over the globe during the 1990s were predicted a year in advance."

Each of these events had its own subtle impact on the economy. But combined, they may have brought an end to the longest economic expansion in U.S. history. Now, however, a larger question looms. Are there any telltale signs suggesting the economy may soon start to turn up again?

Fortunately, yes. If Greenspan keeps pounding down interest rates, the economy will eventually respond. As history shows, cheaper credit, more than any other action by the government, usually succeeds in reviving economic growth.

History also seems to have its own internal timing mechanism of inflection points. For instance, the average postwar recession lasts just 11 months. Assuming the slump began last November, as many preliminary indicators suggest, chances are, the economy should rebound again by fall--although, as any economist can tell you, it's tough to predict.