2001: Economic Flop or Phoenix?

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The New York Stock Exchange is busy as the first trading day of 2001 closes

Happy New Year? With the bears of winter still prowling and the eight-year boom showing signs of going bust, the traditional January salutation has taken on an ironic cast. Your quick guide to the fuzzy economic picture from now until spring.

The Economy: It's slowing — fast, from 5.6 percent six months ago to an estimated 1.5 percent in the spring. But you knew that. What nobody knows is where it goes from there. The efficiencies of the New Economy, whose reported ability to suspend the business cycle was greatly exaggerated, may yet soften the landing, but at some point, consumers will have to do their part and start spending again. Alan Greenspan, with an expected barrage of interest-rate cuts that could begin later this month, and George W. Bush, with a front-loaded tax cut, will try to do the rest.

The markets: Those rate cuts, if they happen, will take at least six months to work their way into the larger economy. But the 49 percent of Americans who own equities may be able to look to the stock markets to bridge the gap. A slowdown — and a whole lot of fear over the tech stocks' burst bubble — has already been priced into many stocks, and the consensus view is that despite the triple-digit Dow and NADSAQ selloffs that greeted investors on the first trading day of 2001, we're definitely closer to the bottom than the top. Fed interest-rate cuts in January and beyond should give blue-chips in both indexes a shot in the arm.

The indicators: That's the conventional wisdom, anyway. But it's a long and winding road between projections and reality, so here are a few signposts to watch along the way. Corporate earnings are expected to fall further toward zero this spring, bringing business investment — one of the economy's make-or-break dynamics — down with it. This was the lead weight on the NASDAQ all fall, and until things pick up (interest-rate cuts should help) any stock rebound will be short-lived. The other half of the equation: Consumer confidence. A good harbinger of consumer spending, which accounts for two-thirds of U.S. economic activity, consumer confidence is what deepens the recessions that start with corporations. Glum consumers save more, spend less, and buy only what they need — a smart idea for the individual, but a boom-killer if practiced in bulk. Unemployment should be rising as the economy slows, but the labor market still looks pretty tight. Good news for laid-off workers and skilled labor, but wage pressures still scare Greenspan. Until the job picture starts to darken, he might be reluctant to cut rates too quickly.

The tax cut: George W. Bush will do his best to present his $1.6 trillion tax cut not only as a give-back of plentiful surplus dollars but as recession insurance. All aspects of the plan will be subject to negotiation in both houses of Congress, and Bush himself will likely need Greenspan's endorsement if the president-elect is to get what he wants. But with Dick Gephardt having publicly resigned himself to the possibility of some kind of tax relief, and Senate Democrats already mulling a $700 trillion counter-offer to Bush's, a tax cut is coming. The only question is which Americans will get the money, and how much they'll get.

The world: The increasing pace of globalization has brought the U.S. markets and those in Europe, Asia and Latin America in greater sync than ever. Which means that a severe American slowdown would almost certainly infect the rest of the globe, and conversely a global slowdown should wash up on U.S. shores with much greater ferocity than in 1997, when free-spending U.S. consumers kept up the country's economic head of steam when all around were losing theirs. Certainly Japan will be no help. Europe, though, looks sluggish but durable, and some analysts expect Brazil to start paying off on its promise in 2001. Barring a major overseas meltdown, the U.S. is likely to control its own destiny.

Survival Tips

They're like opinions and certain parts of the anatomy — everybody's got one — but here are a few rules of thumb.

Be cautious. Don't leave your job if you can help it. Pay down your high-interest debt, and try to salt a few bucks away. If you need cash, refinancing your home may be the best way to raise it — interest rates should be on the way down.

Be patient. Hold on to your stocks, especially the blue-chippers — they can't go much lower. But diversification, meaning owning something besides tech stocks, is definitely a must.

Be calm. Unlike the presidential non-election, a severe economic slowdown won't be a crisis America watches blithely on TV. But with a pro-business president in the White House, a proven maestro at the Fed helm and a short-attention-span nation 20 years removed from a real recession, it's pretty likely things won't get too bad this time around.

Unless, of course, they do.