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First a market crash, now a war: The economy has had a brutal 18 months since the Nasdaq composite passed 5000 in March 2000. The Internet turned into tulipmania; high-tech turned into high risk; now fanatics have desolated parts of lower Manhattan, stopped the U.S. airline industry in its tracks, caused hundreds of conventions to be canceled, emptied thousands of hotels and dimmed the lights on Broadway.
Confident market gurus who cheered the market up during the long bull market are clearly out of their depth; "Dow 36,000" isn't where we are headed. The bullish argument about the American future looks shaky. High corporate profits seem a thing of the past, and academics are increasingly challenging the productivity data that underpinned Fed Chairman Alan Greenspan's optimism about the economy's growth potential. Mass layoffs and the highest number of new claims for unemployment insurance in nine years are undermining the incomes and confidence of hundreds of thousands of households.
The shock and horror of the terrorist attacks in New York and Washington deepen the gloom. Consumer confidence is sinking by the day; rattled investors are seeking signs of direction and asking if they can believe in anything.
The impact of the U.S. downturn on Asia and Latin America will be political as well as economic, and with Japan still hovering on the brink of a full-fledged depression, it is hard to overstate existing risks. Even so, the long-term outlook, both for the United States and the world, remains very strong. It's a time for sober, thoughtful confidence.
That doesn't mean the problems aren't serious. In some ways, the global economic outlook is significantly worse than it was during the 1997-98 financial crisis. For the first time in a generation, Asia, the U.S. and the European Union face simultaneous downturns. With the United States temporarily unable to function as the locomotive of world growth, it is not clear how or when the economic outlook will improve.
For emerging economies, the outlook is particularly worrying. Asian economies remain dependent on exports, especially electronic and high-tech exports, to theUnited States and Japan. Argentina, Brazil and even Mexico look increasingly unstable. Despite its recent bailout by the International Monetary Fund, Turkey has been badly shaken by slow economic growth in Europe and turmoil in the Middle East.
The U.S. economy looks strong, for a number of reasons. First, despite the recent downward revisions to productivity growth estimates, the productivity of U.S. workers is increasing— and increasing fast enough to keep the economy as a whole growing at something close to our long-term historic rate of 3.7% a year. That means investors can have reasonable confidence that, on average, stocks will, over the long haul, perform at historic levels, meaning an average annual return of about 10%.
Walter Russell Mead, a contributing editor to Opinion, is a senior, fellow at the Council on Foreign Relations and the author of "Mortal, Splendor: The American Empire in Transition."