The real reason for the slowdown is that the economy exploded in the fourth quarter of 1999 and first quarter of 2000. High-tech spending was enormous, and it made the economy feel like it was growing much faster than it actually was. The fourth-quarter 1999 spending frenzy was stoked by fears among consumers and companies that the Y2K computer glitch would cause major disruptions in markets and supplies. The spending carried over into 2000, propelled by unbridled optimism that resulted in record retail sales and gravity-defying tech stock valuations. Soaring stock prices created a speculative bubble that was bound to burst.
History says periods of technological innovation are accompanied by times of financial excess.
We had that, and we're experiencing the fallout from it now. Yet, this expansion has been remarkable for relatively tame inflation. Demand hasn't been crimped by high interest rates. It is crumbling because of weaker profits, falling share prices and lackluster investment. This was an accident waiting to happen.