Goldman: Y2K will sting economy

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By Reuters

Special to CNET NEWS.COM

August 21, 1998, 9:40 a.m. PT

NEW YORK--The Year 2000 computer bug could shake up the U.S. economy as much as the 1994 Los Angeles earthquake, say economists at Goldman Sachs, though it is not likely to cause a worldwide recession.

"We see it in the broad statistical context of a natural disaster," like the 1994 Los Angeles earthquake or the 1954 northeastern black-out, Goldman banking analyst Sally Pope Davis said on a Year 2000 conference call. "It could hit Gross Domestic Product for a quarter or two, but not enough to drag us into recession," she said.

Goldman recently held a conference on banking and the Year 2000 issue in New York for clients. Two Goldman economists, Ed McKelvey and Alex Patelis, said in a report that the date change could disrupt the economy in the first few weeks after the turn of the century, but companies would compensate, working overtime to fix computer bugs. They expect marginal downward pressure on productivity but said economic activity could speed up, as consumers stock up ahead of the date change.

Wages could see some upward pressure amid skyrocketing fees to fix the Y2K bug. There is already evidence of such increases in the technology sector, they said.

A space-saving practice used by computer code writers has left many older systems with only two digits to recognize the year. That means that many systems could misread the year 2000 as 1900, causing crashes or mass miscalculations.

The cost of fixing a line of code is expected to jump six-fold, according to MBNA, which attended Goldman's conference. It expects that the cost of fixing a line will cost $6.70 by the year 2000, up from $1.10 now.

The economists are also forecasting either declining profits or accelerated inflation. They said either companies will absorb Y2K costs and report declining profits or pass along the cost of fixing the bug to consumers, through higher prices.

In terms of world financial markets, they said big-cap stocks could get a leg-up, because their systems are better prepared for the date roll-over than their smaller-cap brethren.

U.S. assets could also win more global market share as "flight-to-quality" money seeks a safe haven in U.S. institutions, which are perceived as the best prepared for the next millennium, they said.

For interest rates, the outlook is less clear, Patelis and McKelvey said. Inflationary pressures could push for higher rates, but the Federal Reserve may inject liquidity into the system to avoid crisis, which would mean lower rates. Forward interest rates apparently are already pricing in this latter scenario, they said.