'New Economy' faces market challenges

The heralded "New Economy" -- supposedly cured from traditional booms and busts of the past -- appears to be facing a speed bump. Economic indicators are pointing more toward a hard landing, meaning a recession. A recession occurs when the real Gross Domestic Product (subtracting inflation) is negative for two consecutive quarters, which hasn't happened in the United States since 1990-91.\nThe markets are down, higher interest rates are slowing spending, inflation is edging up, GDP growth is slowing and unemployment is increasing -- harbingers of a possible recession.\nThe Nasdaq Composite, a tech-laden tracker of stock performance, was down nearly 50 percent as of Friday. The broader stock indices are also suffering, as the S&P 500 and Russell 2000 are off 15 and 25 percent from their highs, respectively. A bear market occurs when markets go down by 20 percent or more, said James Stack, president of Stack Financial Management.\nThe Federal Reserve has raised interest rates six times in the past 18 months. This has caused many companies to slow spending on big ticket items such as computers, Internet infrastructure, software and new industrial equipment. These large items are attributed with keeping productivity humming along. \nGrowth in spending on these big-ticket items is expected to slow to less than 8 percent next year -- its lowest level since 1992, according to the U.S. Department of Commerce.\nProductivity allows companies to increase wages without worrying about sparking inflation because their workers are able to produce more goods, thus making up for being paid more. This has helped keep low unemployment and increasing incomes without igniting inflation, according to The New York Times. Couple smaller productivity gains with higher energy costs, and the possibility of inflation becomes much more realistic.\nThe good news about inflation is that while it has crept up a bit, the Federal Reserve doesn't consider it a concern. "Cost pressures and price inflation had remained subdued for an extended period despite low rates of unemployment," according to the minutes of the Fed's Nov. 16 meeting.\nThe minutes went on to report that the slowing of demand should also ease inflation tensions and indicated that the Fed might drop its inflationary warning. Both companies and consumers are spending less.\nThe U.S. GDP expanded by a paltry 2.4 percent, the slowest figure in four years and less than the 2.7 percent expected. As growth slows, unemployment can be expected to increase.\nThe most notable softening in employment is coming from the manufacturing sector. A growing number of economists expect the current 3.9 percent unemployment rate to increase to 4.5 percent in 2001, according to The Wall Street Journal. \nBut there's good news. According to a recent Michigan State study, researchers found the labor market for college graduates should grow by 6 to 10 percent next year, with especially strong demand for liberal arts majors.\nThe "New Economy" is facing its first major challenge since being born with the advent of the Internet. The question remains: Will it run ashore like many dotcoms or weather the storm?