Is The New Economy Dead?

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The immediate payoff, according to many economists, has been a boom in productivity that has raised America's once barely detectable gains in output per hour of work to a robust 5% in 1999. That permitted the economy to grow at an unbelievable 8.3% annual pace in last year's final quarter while inflation stayed comfortably below 3%. "The New Economy," Sinai notes, "creates efficiencies and lowers the cost of everything we do."

And that efficiency includes, it turns out, funding new businesses and laying waste to those that disappoint. On Wall Street, day traders and fund managers continue to smart over this year's natural--even desirable--bursting of the speculative tech-stock bubble. "The Internet really turbocharged everything," says Marshall Acuff, chief equities analyst for Salomon Smith Barney. "It was the infinite expectations for the Internet that pushed excitement to the ultimate level."

Amid the frenzy, the market awarded astronomical valuations to dotcom companies that had never made a dime--and paid an unheard of 100 to 200 times earnings for true New Economy leaders like Cisco or Sun Microsystems or Dell Computer, whose stocks have since plunged some 50%. "The current growth rate of earnings won't support stocks with high valuations," says Hugh Johnson, chief investment officer for the investment firm First Albany. "That's why technology stocks are coming down so sharply."

Yet the technology sector as a whole, like the rest of the economy, remains financially vibrant. Sinai estimates that earnings for U.S. tech companies will grow a healthy 18% a year for the next three to five years. While that would pale in comparison with the phenomenal 25%-to-30% annual increases the companies have chalked up since 1995, it would be more than enough to lead the economy.

Tell that to the countless dotbombs that have suddenly vaporized. Gazoontite.com , an online and off-line dispenser of air purifiers, hypoallergenic stuffed toys and all things sneeze-and-wheeze related, has snuffled into Chapter 11 bankruptcy court. Scour, the troubled Web entertainment site backed by Hollywood superagent Michael Ovitz, filed last week to reorganize itself under Chapter 11.

The relentless setbacks have left normally ebullient Silicon Valley dazed and chastened. Among the phrases that venture capitalist Danny Rimer no longer wants to see in business plans are "losses for the next five years" and "recent business school graduates"--which now look suspiciously like the preamble to failure.

Even growing companies have shut down in the face of VC disdain and looming cash shortages. Three weeks ago, Kibu.com , a start-up that had made healthy inroads in the teen-girl market by building a cyberchat "hangout," shocked analysts by closing while it still had a healthy bank balance. The reason? Kibu was unlikely to be "valued appropriately"--in other words, stupefyingly overvalued--by a market that has lost its appetite for IPOs. So it gave investors some of their money back. Indeed, the shell-shocked look on the faces of dotcomers who only yesterday had dreamed of Maseratis is no accident. In the past month alone, as many as 4,000 people have quit or been laid off from online ventures.

It's no small irony that even as Silicon Valley suffers, much of the heartland still basks in the good times the New Economy has made possible. Throughout the Midwest, consumers have been shrugging off the downturn in stocks and taking out home-equity loans to finance remodeling, or a new car or a European vacation. "There's not a chance this boom is over," says Diane Swonk, chief economist for Bank One in Chicago. "Consumer attitudes are high in the face of high oil prices, stock-market volatility and even election rhetoric. Most Americans live on Main Street, not in Silicon Valley."

Consumers are still spending with a vengeance. Use of revolving credit, largely credit cards, is way up--a startling 13.5% over last year's rate. That could mean a stronger Christmas season than the weak one expected--and more inflation worries for the Fed.

At the same time, there are too many places to spend, and the rapid expansion of e-tailers hasn't helped. Just last week Home Depot warned that it would miss its profit targets for this year's third and fourth quarters--a disclosure that contributed to the Dow's slump. Other retailers, such as Gap and Nordstrom, are also struggling. "We have gone from being an over-stored country to being an even more over-stored country," says Todd Slater, who watches the industry for Lazard Freres. The situation, Slater says, leaves many companies "dangerously overextended."