An exceptionally strong job market. The Fed raised rates quickly. Overheated financial markets are starting to correct themselves, with the most frothy sectors bearing the brunt.
That’s how it is today – This was also the case in the spring of 2000 when the dotcom bubble started to burst. A recession followed, but not until a year later.
Why it matters: The year 2000 offers important lessons about the nature of risks to the economy—and what to watch out for to understand how bumpy the journey from here can be.
flashback: this stock market peaked in March 2000. But as time goes on, there are growing signs that the good times for cash-burning internet companies are drawing to a close.
- The layoffs started as a trickle, then turned into a gushing stream. IPOs were put on hold, and shares of public companies fell. Website pops up to track ‘burn rate and layoff plans’F*d” company.
Yes, but: The overall economy actually performed well that year. After all, the vast majority of people don’t work for dot-com companies, and corporate America as a whole remains fundamentally bullish on investing and hiring.
- The number of new jobless claims hit a multi-decade low in April 2000 and did not begin to rise sharply until the end of the year. The unemployment rate for the year is 3.9%, just one-tenth above its April low.
- In March of that year, inflation hit a decade high of 3.8%, and the Fed raised interest rates by half a percentage point in May in an attempt to rein in inflation.
this is only In 2001, as companies scaled back growth plans and layoffs became more common, the wheels of the entire economy began to fall off. Economists finally set the start date of the recession as March 2001—a full year after the stock market peaked.
- What’s more, this was an unusually mild recession—probably not a recession at all if the terrorist attacks of September 11, 2001 hadn’t happened. The attacks have thrown an already faltering economy into temporary disarray — a reminder that geopolitical events can cause more economic pain when things are already on the line.
Big picture: If you take the parallels between then and now seriously, it has some important implications for how the economy will move in the months ahead — and what to watch to know if a full-blown recession is on the way.
- Watch carefully to see if corporate behavior is starting to change external Companies most directly affected by stock market sell-offs and cryptocurrency crashes. If Robinhood or Coinbase cut jobs, it won’t matter to the overall economy — but if all companies start doing the same, or cut capital spending plans, that’s another story.
- Consumer demand drives the economy forward, which is why the recession in 2001 was so mild; not a single quarter of that year fell in personal consumption expenditures. That, too, looks likely to be true given strong household balance sheets and rising wages.
- Focus more on the corporate debt market than the stock market. The real economic problem in 2001 came when losses in the telecommunications sector led to a wave of bankruptcies and led investors to sell all types of corporate bonds – tightening the flow of credit in the economy, a key feature of the 2001 recession.
And one more thing: Be prepared to take the blame. The wave of recession two decades ago exposed the deep rot in companies far from the dotcom bubble, such as energy trading firm Enron and industrials company Tyco International.
Bottom line: The U.S. is likely to emerge from recession this time around. But when sentiment reverses, as it was 22 years ago and now, it becomes more vulnerable to any bad news that might come.
