A MYTH EXPOSED
How many times over the past decade have you heard glowing reports about the "New Economy"? Hundreds, maybe thousands of times, right? It's been everywhere.
While the number of references to the "New Economy" in US and global publications hasn't reached anywhere near its year 2000 zenith of 4247, the mainstream continues to grasp for the illusion. In 2001, mainstream publications mentioned the vaunted "New Economy" 2408 times.
Even in early 2002, following high-profile scandals on Wall Street, the term "New Economy" was still garnering an enormous amount of interest. In the first 3 months of this year, the press tossed around the term at nearly a 1000-times annual rate.
Economists continue to celebrate the broadening "service economy" and proclaim that economic growth in the new Information Age has been "unprecedented" in its
vibrancy, resilience and scope.
Rhetoric is cheap. Evidence is something else.
As a regular reader of the Daily Reckoning you know that. You are well aware we have not had anything near a New Economy, and that all that talk is bogus. But what
you may not know - and what you are about to discover - is that the economic expansion of recent decades in the world's leading economic power, the United States, much less the rest of the world, is even far less impressive than most investors have been led to believe.
In fact, economic expansion during the late great "boom" period, which lasted from 1974 to 2000, was demonstrably weaker than that during the previous boom, which lasted from 1942 to 1966.
Both periods sported a persistent bull market in stocks that lasted about a quarter century, so in that sense, they are quite similar. But one noticeable difference is
that the DJIA gained only 971% during the previous expansion, but a remarkable 1930% during the most recent one - twice the amount.
This tremendous bull market in stocks is the great "boom" that people have felt in their bones. Yet as you are about to see, the economic vigor and financial health of the boom period from 1974 to 2000 - the one that has received so much radiant press - failed to measure up to those of the 1942 to 1966 by every meaningful comparison. Please take a look at these comparative measures of "Economic Health":
Gross Domestic Product (GDP)
* From 1942 to 1966, the average annual real GDP growth rate was 4.5%.
* From 1975 through 1999, it was only 3.2%.
Industrial Production
* The average annual gain in industrial production from 1942 to 1966 was
5.3%.
* From 1975 through 1999 it was only 3.4%.
Combining GDP and industrial production figures, we may generalize from the
reported data that the economic power of the most recent boom period was
one-third less than that of the previous.
But that's only the beginning. To grasp the full measure of the underlying
weakness in these "fundamentals," one must look beyond economic figures to
the social balance sheets that underlie the results. Here are three
examples:
Consumer Debt
* At the end of 1966, consumer debt was 64% of annual disposable personal
income. That is considerable, but compare that to the end of 1999, where
consumer debt was
97% of disposable income.
Federal Budget Deficit
* From 1942 to 1966, federal budget deficits were not sustained. The only
consecutive years of deficits were in the war years of 1942-1946. The
average annual federal deficit was less than $9 billion.
* In the current era, the annual federal deficit averaged $127 billion,
which is far greater, even when adjusted for inflation.
Personal Savings Rate
* During the boom of the '50s and '60s, the personal savings rate followed a
fairly flat trend, bottoming at 6.5% of disposable personal income in
February 1969.
* It's no secret what has become of savings in our time.
The personal savings rate dropped persistently, falling to a record low of
0.5% in March 2000.
Despite media hype to the contrary and a widespread desire among gullible
investors, it has not been a "New Economy" at all but rather a comparatively
lackluster one.
Collectively, these statistics reveal that the economic advance in the
United States has been slowing on a major-trend basis, a trend that is still
manifest today.
More than just a single or double-dip recession, the persistent deceleration
in the U.S. economy from 2000-2002 portends a major reversal from economic
expansion
to economic contraction.
But we need not rely on hypothesis or statistics alone.
The 20th century provides two great precursors to the current situation.
As has been widely discussed here in the Daily Reckoning, the phrase in
vogue in the 1920s was that the economy had entered a "New Era." Economists
of the day,
as President Hoover ruefully recalled in his memoirs, gushed over the
wonderful economy, just as they are doing today. Were the Roaring Twenties
truly a New Era,
or was such talk a spate of hype spurred by the good feelings associated
with a soaring stock market?
According to data from Professor Mark Siegler of Williams College (MA), from
1872 through 1880, the annual inflation-adjusted Gross National Product of
the
United States rose from $98 billion to $172 billion, a 68% gain.
From 1898 to 1906, real GNP rose from $228.8 billion to $403.7 billion, a
56% gain.
In contrast, from 1921 through 1929, during the Roaring Twenties, GNP in the
supposed "New Era" rose from $554.8 billion to $822.2 billion, only a 48%
gain.
This latter performance was particularly poor given that the stock market
enjoyed a greater percentage rise from 1921 to 1929 than it had done in any
equivalent time in
U.S. history.
Similarly to today, the economy of that time failed to keep pace with the
advance in stock prices and under-performed the prior expansion. The
aftermath was the
Great Depression.
And if you are over 20 years old, you surely remember the "Japanese Miracle"
of the 1980s. The country's corporate managers lectured and wrote books on
how they
did it, and the world's CEOs flocked to emulate their style. The Japanese
Nikkei stock average soared, and foreign investors poured into the "sure
thing." Was the
Japanese economy truly miraculous, or once again, were economists ignoring
economic statistics and simply expressing the good feelings associated with
its
stampeding stock market?
Japan's growth from 1955 through 1973 was extremely powerful, averaging 9.4%
per year. But its economic growth from 1975 through 1989 averaged only 4.0%
per
year. This relatively poor economic performance coincided with a
record-breaking stock market boom. Just as in the U.S. in the 1920s, the
economy in Japan's celebrated years failed to keep pace with the advance in
its Nikkei stock index and under-performed the prior expansion. This double
dichotomy signaled an approaching reversal of multi-decade importance in
both stock prices and the economy.
Since the top of its own boom, the Nikkei stock index has plunged 70%, the
economy has had three recessions in a dozen years, and the banking system
has become deeply stressed.
The "New Era" of the 1920s ended in a bust. The "Japanese Miracle" of the
1980s ended in a bust. What do you suppose will happen to today's "New
Economy"? More
to the point, are the recent rallies in the stock market the sign of a
bottom and imminent recovery?
You can decide for yourself.
But I suspect that when historians return to this time they will discover
the slow but persistent regression in both U.S. and worldwide growth over
the decades in the
latter half of the twentieth century and wonder why so few recognized it as
a signal of the coming change.
Regards,
Bob Prechter, for The Daily Reckoning
Editor's Note: Bob Prechter is president of the economic
forecasting firm Elliott Wave International.
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