United States in 21th century : The Faltering Economy

After nearly a decade of unprecedented expansion during the 1990s, the American economy began to show signs of a slump at the beginning of the 21st century. In 2000 the so-called dot-com bubble—the speculative investment in companies that sprouted up to take advantage of the Internet—burst. Analysts cited many reasons for the failure of these companies. Among them was that investors overestimated the extent to which consumers were willing to buy goods and services online. When venture capitalists—the people and companies that provide money to start-up businesses—became reluctant to invest new funds, the collapse began.

As many Internet companies went out of business, the stock prices of once high-flying companies such as Cisco Systems, Inc., and Lucent Technologies began to plummet. Other large companies, such as Microsoft Corporation and AOL Time Warner, Inc. (present-day Time Warner Inc.), announced that they would not meet projected profits. And just as high-technology stocks fueled the market’s rise, they dragged the market down. Both the Dow Jones Industrial Average and The Nasdaq Stock Market ended 2000 with a loss.

Soon the rest of the economy started to weaken. The National Bureau of Economic Research, a respected group of economists, estimated that the U.S. economy actually stopped growing in March 2001. Manufacturing and employment began to decline. The big automobile companies shut down plants and laid off thousands of workers. As businesspeople traveled less, airlines began cutting back. By the end of 2001, corporate profits had suffered one of their steepest drops in decades.

Many economists believe that the terrorist attacks of September 11, 2001, made the country’s slumping economy even worse. After remaining closed for several days after the terrorist attacks, the stock market suffered a record plunge when it reopened, with anxious investors selling off their holdings.

Companies continued to trim workers, accelerating a downsizing that would total more than 1 million jobs by the end of 2001. Unemployment reached 8.3 million in December 2001, the highest in seven years.

The federal government tried to cushion the economic blows. Within two weeks of the terrorist attacks, Congress approved $15 billion in aid for the devastated airline industry. But with billions of additional dollars earmarked for defense spending and domestic security in the wake of September 11, the government only had a limited ability to cope with the faltering economy.

As 2002 began, however, the stock market rebounded strongly, and the pace of corporate layoffs slowed. Interest rate cuts by the Federal Reserve brought interest rates to record lows and helped some sectors of the economy. Studies showed that even after the terrorist attacks, American consumers continued to buy homes and cars in record numbers.

George Bush in 1989. Encarta

In 2003 the major stock indexes recorded healthy gains, and other economic indicators were positive. The recovery failed to replace the estimated 2.4 million jobs lost during the downturn, however, and some economists characterized it as a “jobless recovery.” Some corporations announced that they were hiring workers overseas to replace workers in the United States, a practice known as outsourcing. As 2005 began, concerns over inflation, motivated in part by a rise in petroleum prices, led the Federal Reserve to begin raising interest rates at a faster pace than previously anticipated. Encarta