Economy slowing to merely 'normal'

Higher interest rates and less consumer spending check growth.

Only a few months ago, Objectspace Inc., a Dallas company, planned to raise $75 million from stock market investors. The new capital would finance acquisitions and projected growth of more than 100 percent a year.

But, last week, in a sign the economy has changed, the company gave up on raising the money in the market. Without the benefit of the new cash, the Web service provider's workforce will stay at 250 instead of expanding to 400 by year's end.

What's happened to Objectspace is taking place around the country: The boom times have disappeared and the US economy is finally starting to slow. The fizz is gone from housing, consumer electronics, retailing, and car sales. Consumer confidence is fading. There are even signs that labor shortages are beginning to ease, and economists expect the jobless rate to start back up soon.

Although it's not clear if the slowdown is permanent - or may even lead to a downturn next year - economists have turned much less optimistic. Last week, some of that moderation was validated when the government reported the third quarter Gross Domestic Product (GDP) had increased by only 2.7 percent, down from 5.6 percent in the second quarter.

"The GDP numbers confirm what the stock market has been saying - all the pizazz is a thing of the past," says Scott Grannis a principal in Pasadena, Calif.-based Western Asset Management.

From a political standpoint, the first signs of an economic slowdown are coming at a critical time. The election is only 8 days off. Yet the economy, for now, is not an issue. "I spend a lot of time talking to Rotaries and other groups, and I can tell you the mainstream is not very worried at all," says David Orr, chief economist at First Union Bank in Charlotte, N.C. "If George Bush tried to make the case that the economy is about to turn into something unfavorable, he would be perceived as a scaremonger."

The slowdown is mostly the result of Federal Reserve policy. Since June of 1999, the Fed has raised interest rates six times in search of a "soft landing" - slower growth without a recession. "That is exactly what we have - moderate growth," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "The Fed has tapped the brakes, not mashed them to the floor."

Reverse 'wealth effect'

But the economy is slowing for other reasons as well. Central banks around the globe have been raising interest rates. As a result, world stock markets have moved lower as investors have become more bearish about economic prospects. Currently, only two major markets - China and Canada - are in positive territory this year. "It's an indication corporate earnings are expected to fall," says Mr. Grannis.

A slower world economy has a ripple effect on the US. Export markets will begin to dry up. And foreign companies, watching their own economies slide, will try to sell their goods in the US.

The expectation of more modest growth extends to the holiday period. Over the past two years, holiday sales have grown by about 9 percent. This year, economists are predicting a five percent increase. "Retailers are starting to scale back," says Mr. Orr.

To economists, it's not surprising that consumers have become more selective. Last week, a University of Michigan consumer survey found that confidence had dropped for the third month in a row, to the lowest level of the year. Although the overall index remains high, the current level shows consumers' attention is now more "defensive as they look to protect their past gains," says Richard Curtin, survey director.

As signs of a slowing economy spread, it is becoming more difficult for entrepreneurs to get financing. "Banks are more cautious: They've raised their lending standards," says Mark Zandi, chief economist at The Economy.com, an economic Web site.

Nowhere is this more apparent than in the Initial Public Offering (IPO) market, where new companies go to raise capital from investors. For the last several years, companies with ideas - but not profits - have seen stock prices soar. At times investors have given companies with almost no revenue a market value greater than Blue Chip companies.

Not anymore. For example, on May 15th, Extricity Inc. of Redwood Shores, Calif., said it hoped to raise $60 to $70 million with an IPO. But in the past four weeks, companies like Extricity that provide business-to-business software products have seen their stock prices fall 22 percent. As a result, the firm is withdrawing its public offering. Overall, in the past five months, 145 of the 390 companies registering IPOs have withdrawn them.

"When you are in public registration, it distracts management, so it made sense to pull back," says Steve Albertolle, chief financial officer for Extricity, which grew at 189 percent the past year. "None of our business fundamentals have changed, but the market is in a real churn."

Closer scrutiny

The churn reflects changes in investor attitudes. "Institutions are looking to be sure you are growing at a more controlled pace," says Steve Lipari, chief financial officer of Objectspace. "We are just going to have to move ahead a little more carefully."

(c) Copyright 2000. The Christian Science Publishing Society

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