Following the stock market crash of October 1987, forecasters re-
duced their GNP growth estimates of 1988 over 1987 from 2.8 percent to
1.9 percent, the largest drop in the 11-year history of the survey. Instead,
economic growth in 1988 was nearly 4 percent, as the economy grew
strongly despite the stock market collapse.
As the expansion continued, belief that a recession was imminent
turned into the belief that prosperity was here to stay. The continuing ex-
pansion fostered a growing conviction that perhaps the business cycle
had been conquered—by either government policy or the “recession-
proof” nature of our service-oriented economy. Ed Yardeni, senior econ-
omist at Prudential-Bache Securities, wrote a “New Wave Manifesto” in
late 1988, concluding that self-repairing, growing economies were likely
through the rest of the decade.^9 On the eve of one of the worst world-
wide recessions in the postwar era, Leonard Silk, senior economics edi-
tor of the New York Timesstated in May 1990 in an article entitled “Is
There Really a Business Cycle?”:
Most economists foresee no recession in 1990 or 1991, and 1992 will be an-
other presidential year, when the odds tip strongly against recession.
Japan, West Germany, and most of the other capitalist countries of Europe
and Asia are also on a long upward roll, with no end in sight.^10
By November 1990, Blue Chip Economic Indicatorsreported that the
majority of the panel believed the U.S. economy had already slipped, or
was about to slip, into a recession. But by then, not only had the econ-
omy been in recession for four months, but the stock market had already
hit its bottom and was headed upward. Had investors given in to the
prevailing pessimism at the time when the recession seemed confirmed,
they would have sold after the low was reached and stocks were headed
for a strong three-year rally.
The record 10-year expansion of the U.S. economy from March 1991
through March 2001 again spawned talk of “new era economics” and
economies without recession.^11 Even in early 2001, the vast majority of
forecasters did not see a recession. In fact, in September 2001, just before
the terrorist attack, only 13 percent of the economists surveyed by Blue
Chip Economic Indicatorsbelieved the United States was in a recession
even though the NBER subsequently indicated that the United States re-
cession had begun six months earlier in March.^12 And by February 2002,
218 PART 3 How the Economic Environment Impacts Stocks
(^9) “New Wave Economist,” Los Angeles Times, March 18, 1990, Business Section, p. 22.
(^10) Leonard Silk, “Is There Really a Business Cycle?” New York Times, May 22, 1992, p. D2.
(^11) See Steven Weber, “The End of the Business Cycle?” Foreign Affairs, July/August 1997.
(^12) Blue Chip Economic Indicators, September 10, 2001, p. 14.