The Economist 2001-05-10
The announcement on May 8th that America's productivity declined in the first quarter of 2001 at an annual rate of 0.1%, compared with growth of more than 5% during the year to June 2000, is a blow for the IT-powered new economy. One by one, its claims to be special are being exposed as myths. Now it seems that the widely-held belief that America's sustainable rate of productivity growth had doubled to around 3% was also mere myth. That does not mean, however, that the new economy was entirely hot air.
Its cheerleaders have certainly been muffled this year by the plunge in the Nasdaq high-tech stockmarket index, by the collapse of dotcom firms, by the slump in the profits of Internet giants such as Cisco (which this week reported its first quarterly loss in 11 years and a 30% decline in sales), and by signs that the American economy may be heading into recession. The new-economy sceptics, who long argued that computers and the Internet did not rate in the same economic league as electricity or the car, are now grinning smugly. They have a long list of unfulfilled promises to point to.
Top of the list is the idea that the traditional business cycle is dead. Now that America's economy is slowing sharply and unemployment is rising, everybody is trying to deny that they ever made such a claim. Instead, they argue that IT helps to smooth the cycle. But even that claim looks suspect: if America's GDP growth this year slows to the average forecast of 1.5%, then the decline in growth from 5% last year would be very abrupt indeed. And because of the excesses that have built up during the boom years-such as too much investment and too little saving-there is a high risk that the downturn could be much deeper.
If America's GDP growth were to fall below 1% this year, it would be the sharpest slowdown between any two years since the 1974-75 oil crisis. So much for smoothing.