First, the stock market took another nose dive. From the start of 2002 until Nov. 27, the NASDAQ composite index was down 25 percent, in spite of a recent rally. The S & P 500 fell 19 percent in that same period. Millions of owners of stock thus suffered large equity losses. Second, job formation was very weak. Unemployment rose to 6 percent in April and again in November, and total job growth was less than one-half of one percent – compared to an average of 1.7 percent from 1992 through 2000.
Third, certain key sectors of the economy were in the tank economically. These include the airlines, hotels and resorts, the telecom and internet industries, and state governments – which are suffering from enormous fiscal deficits. Fourth, commercial real estate markets deteriorated greatly and are experiencing a true recession, even though the overall economy is not. Office and industrial vacancy rates shot upward because of an unprecedented withdrawal of demands for space, plus huge surpluses in sub-leasing and rented-but-not-used space. Rents fell, but property values for well-occupied buildings and for most real estate investment trust shares were held up by strong demands from investors fleeing out of stocks.
Finally, there was – and still is – a tremendous amount of general uncertainty and insecurity because of the war on terrorism in general, and the possibility of war in Iraq in particular. The resulting malaise was intensified by the episode of the Washington-area snipers, who showed that any part of the nation could easily be terrified and upset for weeks by just two renegades.
As we look ahead into 2003, several of these factors will continue to make many Americans feel bad, but others probably will not. We hope the stock market has bottomed out and therefore will not take another nosedive – though no one can be certain. The heavily depressed sectors are likely to stay depressed, unfortunately, and job growth will probably be low again too. Commercial property markets are not going to get much better, but perhaps they will not get much worse either. Uncertainty caused by terrorism and Iraq are still with us as 2003 begins, and surely the former type will remain even if war either is accomplished or becomes less likely. So we will probably feel slightly better in 2003 than in 2002 – but not a whole lot better – even if real GDP again grows in the three percent range, which seems likely.