Economy 2022, financial markets like the year 2000 again

An exceptionally robust labor market. The Federal Reserve is raising interest rates at a rapid pace. Overheated financial markets are beginning to correct, with the foamier sectors bearing the brunt.

This is the situation today — and this was also the situation in the spring of 2000, when the Internet bubble began to burst. A recession followed, but not for a year later.

Why is this important: The year 2000 offers important lessons about the nature of the risks facing the economy – and what to watch for to understand just how bumpy the ride from here could be.

Rollback: The stock market peaked in March 2000. But as the year progressed, signs showed the good times were coming to an end for cash-burning Internet companies.

  • The layoffs started as a trickle and became a spurt. IPOs have been suspended and companies that have gone public have seen their stock prices fall. Websites have sprung up to track the burn rate and layoff plans of “F*d” companies.

Yes, but: The overall economy has actually held up well throughout this year. The vast majority of people, after all, weren’t working for dot-com companies, and corporate America as a whole was still fundamentally optimistic about investing and hiring.

  • The number of people filing new unemployment claims hit a multi-decade low in April 2000 and only began to rise in earnest at the end of the year. The jobless rate ended the year at 3.9%, just one-tenth above its April low.
  • Inflation hit a decade high of 3.8% in March, and the Fed raised interest rates by half a percent in May in an attempt to bring inflation under control.

It was only in 2001 that the wheels began to come off the wider economy, as companies scaled back growth plans and layoffs became widespread. Economists would ultimately date the start of a recession to March 2001 – a full year after the stock market peaked.

  • What’s more, it was an exceptionally mild recession — and might not have been considered a recession at all if the September 11, 2001, terrorist attacks hadn’t happened. The attacks sent an already shaky economy into a temporary slump – a reminder that geopolitical events can cause more economic pain when the situation is already precarious.

The big picture: If you take the parallels between yesterday and today seriously, it has important implications for how the economy will perform in the months to come – and what to watch out for if a full recession occurs. .

  • Watch carefully if corporate behavior starts to change outside the companies most directly impacted by the stock market sell-off and crypto meltdown. It doesn’t matter much to the overall economy if Robinhood or Coinbase lay off – but it’s a different story if the whole slate of companies start doing the same or cut capital spending plans.
  • Consumer demand propelled the economy forward and was the reason the recession was so mild in 2001; there was not a single quarter that year in which personal consumption expenditure declined. This also seems true in this episode, given the strength of household balance sheets and rising wages.
  • Pay more attention to corporate debt markets than to the stock market. The real economic problems of 2001 came when losses in the telecommunications sector caused a wave of bankruptcies and led investors to sell all types of corporate bonds, which tightened the flow of credit in the economy. , a key feature of the 2001 recession.

One more thing : Be prepared for recriminations. The economic downturn of two decades ago revealed a deep rot in companies far from the dot-com boom, like energy trading company Enron and industrial company Tyco International.

The bottom line: The United States may well escape a recession this time around. But when market sentiment reverses, as it did 22 years ago and does now, it becomes more vulnerable to any bad news that may come.