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Beginning of the 21st Century, The Faltering Economy

AOL Time Warner, Lucent Technologies, defense spending, rate cuts, new funds

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 explosion of 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., 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 terror 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.

However, there were some hopeful signs as 2002 began. The stock market rebounded strongly, and the pace of corporate layoffs slowed. Interest rate cuts by the Federal Reserve 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. But the United States faced a long, steep, and uncertain climb back to the heady economic days of the 1990s.

The first part of this article was contributed by Paul E. Johnson. The second part, from Reconstruction to End of the 20th Century, was contributed by Nancy Woloch. The third part, Beginning of the 21st Century, was contributed by Bill Turque.

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