A booming stock market, fueled by a few buzzy names. CEOs predicting huge productivity gains from new technologies. Robust GDP growth, but job creation starting to crack.
- That was the situation in the year 2000, and is the situation today, only accentuated by a sell-off in some of this cycle's big-name stocks the last few days.
The big picture: A close look at what happened during that turn-of-the-century business cycle can shed light on what might happen in the next couple of years, as companies implement labor-saving AI advances across their operations and investors wrestle with priced-for-perfection asset markets.
- In that episode, GDP growth remained mostly solid, even amid a popping asset bubble. Consumer spending held up. But the job market was weak for years.
Flashback: The S&P 500 peaked in March 2000 before beginning a long bear market. Job growth turned consistently negative in early 2001.
- The economists who make these calls would eventually conclude that there was a short recession in 2001, but it was a curious kind of recession — and at best a borderline call.
- GDP never fell for two consecutive quarters. GDP was narrowly up (0.2%) in 2001 and returned to solid growth in 2002. The GDP slump was caused by a collapse in investment in telecommunications equipment.
- Personal consumption expenditures, the biggest driver of overall economic activity, were positive every single quarter of the cycle — boosted by 2001 tax cuts and Fed interest rate cuts.
Yes, but: GDP bounced back quickly, but the job market didn't. For workers, it was a long, jobless recovery.
- After shedding 1.7 million jobs in 2001, employers cut another 518,000 in 2002. Year-on-year job growth was still negative as late as November 2003, two full years after the recession had technically ended.
- At year-end 2003, total employment was lower than it had been at the end of 1999 — while America's economic output was 10% higher.
Between the lines: This combination of solid GDP growth and continued job losses reflected soaring productivity.
- Corporate America was finally getting the bang for its buck out of years of information technology investment. A wave of outsourcing and offshoring — enabled by tech advances and globalization — meant that they could keep growing economic output with fewer hours of work by American labor.
- High productivity growth, in other words, can make society richer in the long run while causing, or at least coinciding with, a painful period of adjustment for workers.
Reality check: There may or may not be a correction ahead for this generation's big-name stocks, and generative AI may or may not live up to the promises of its biggest enthusiasts.
- But the early 2000s experience shows that even if there is a significant rewiring of the economy ahead, it won't necessarily translate into a recession, or at least not a severe one.
- Yet the adjustment period for workers probably won't be much fun, no matter how things look in the National Income and Product Accounts.
