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Is it really a new era?
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October 28, 1999: 5:26 p.m. ET
Growth without inflation is the product of the digital age, but is it here to stay?
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - For much of the late 1990s, investors have been holding their breath, waiting for the almost nine-year-old economic expansion to come to a screeching halt.
On Thursday, they took a collective gasp of air.
The U.S. economy officially entered the uncharted territory of the New Economy Thursday, some economists contend, after the government released its tally on third-quarter growth and employers' wage costs, which showed that the economy is growing at a rapid clip with surprisingly little inflationary pressure.
The numbers lit a firecracker under stocks and bonds, pushing the Dow Jones industrial average more than 227 points higher and sending the price of the benchmark 30-year Treasury bond up more than a full point, all on expectations of low inflation and stable interest rates.
But has the New Economy, as it's been coined by Wall Street and the financial media, really arrived?
A new era
"There is no question that we've entered a new era," said Stuart Hoffman, an economist with PNC Bank. "The question seems to be how long it will continue, and the jury is still out on that one."
Economists have been scrapping with each other for the better part of the decade over whether the new economy has arrived or whether the traditional economy with its peaks and valleys of good times and bad is still lurking in the shadows of the gravity-defying stock market.
The naysayers argue that the traditional economic cycle is alive and well, and that while technology has made people's lives a lot easier, it's done so at a price -- either in terms of the amount of time they spend working, or the amount of additional money they commit to goods and services.
What's more, they say, growth can't continue at its current pace without triggering some kind of upward move in prices. They point to traditionally negative indicators such as the shortage of available workers, high real-estate values, all-time-low personal savings rates and a global economy that seems to want more and more U.S.-made goods -- and is willing to pay top dollar for them.
Another revolution
The nouveau economic set, by contrast, points to ever-growing advancements in productivity, which have allowed companies to boost production, lower costs and pass those savings onto consumers in the form of stable, if not declining prices for goods and services.
Multitudes of comparisons have been made between the turn of the 20th century and the arrival of the 21st -- all suggesting that the digital age, like the industrial age, has allowed for unparalleled prosperity at a cheaper price.
And indeed, in almost every part of the world, technology has made the human race faster, better, cheaper. Like railroads in the late 1800s, cars in the early 1900s, radio in the '20s and television in the '50s, technology is changing the economy in a way that analysts, investors, politicians and policymakers are just beginning to understand.
"Increases in capacity, along with improvements in productivity performance, have made possible increases in living standards without inappropriate inflationary pressures," U.S. Treasury Secretary Lawrence Summers said Thursday.
"This new report shows once again that if we have strong fiscal discipline, strong investment and a strong commitment to education and the new economy we can get an investment boom and maximize the benefits of the information and technology revolutions now going on all over the world," reiterated President Bill Clinton.
Alternate paradigm
"This is a new paradigm," said Joel Kent, an economist with Lehman Brothers in New York. "The fact that we have higher productivity has allowed the U.S. economy to grow more and grow more rapidly without triggering the usual inflation pressures."
A new paradigm, indeed. But the question remains: will it last, or is it simply an elongated extension of the traditional business cycle, destined to crash?
"We continue to see very rapid economic growth which has been a problem for the Fed all along," said Charles Lieberman, chief economist with First Institutional Securities. "We have not seen a material increase in labor costs and that's what I think is going to be the ultimate problem in the economy somewhere down the road, though clearly it's not imminent."
Indeed, the sentiment could change just as quickly as it did last April when the Commerce Department reported a surprise 0.7 percent jump in consumer prices -- a number that sent bond yields through the roof, stocks plunging and led to renewed concern about rising interest rates.
Fed Chairman Alan Greenspan has long been a proponent of the new economy, stating in speech after speech that technology has altered the U.S. economic landscape in ways never before seen. Greenspan will speak in Boca Raton, Fla., this evening about "Technology and the Economy." He's expected to begin speaking at 7:30 p.m. ET.
But as much of a proponent as he and many of his Fed colleagues appear to be, it doesn't appear that they're completely sold on the idea. That's evident in their not-so-subtle switch to a "tightening" bias from a "neutral" bias at the end of the Oct. 5 policy meeting - a telegraph to the world that they are not yet willing to let go of the reigns.
And, if you listen carefully to Fed Chief Greenspan's recent remarks, you'll undoubtedly recognize the same two words used on many different occasions to describe the progress of the economy and the role technology has played.
History and Repeats.
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