Warning: Without fixes, a recession is possible

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Sunday, August 23, 1998

By EDWARD YARDENI

The Associated Press

There is much that we don't know about the year 2000 problem. However, we do know that most computer systems must be fixed to recognize that in the widely used two-digit year field, the 00 means 2000, not 1900. We know that if they are not fixed in time, computer malfunctions would greatly disrupt our businesses, governments, and our daily lives.

So there is a great deal at risk.

We also know that we are running out of time. As of Wednesday, Global Y2K Action Day, only 500 days remained until the millennium.

With so little time left, it is unlikely that all critical systems will be fixed in time. Only naive optimists can assume there won't be any malfunctions significant enough to disrupt our global economy.

I estimate a 70 percent chance of a global recession in 2000 that could be at least as severe as the global economic downturn in 1973 and 1974. In the same way that a disruption of the oil supply caused a global recession back then, a disruption in the flow of information could cause one in 2000. Stock prices could fall 30 percent starting later this year or early next year, since the market typically anticipates the economic outlook by six to 12 months.

We know that whatever systems are doomed to fail will all do so about the same time, at the start of the millennium. This will make it difficult to get help, delaying the recovery effort and deepening the recession.

I am amazed by the lack of alarm about Y2K, especially among our global policymakers. The only organization in the world providing regular public progress reports about efforts to fix the Y2K problem is the U.S. government. The latest one is not encouraging, though the administration is pressuring federal agencies to fix their systems and be ready for testing by the end of next March.

No one knows how much progress is being made among state and local governments, private business firms, foreign businesses, and foreign governments. No one can say with any certainty that the following systems won't malfunction during 2000: nuclear missile systems, electric power grids, oil and gas distribution, telecommunications, air traffic control, transportation, shipping, manufacturing, banking, finance, and government services.

We need more answers from our business and government leaders about Y2K so we can assess the risks and prepare contingency and disaster recovery plans. The Clinton administration kicked off a "National Campaign for Year 2000 Solutions" at the end of July. I hope that the aim is to keep the public informed about the potential for trouble.

An informed public may be alarmed by the problem, but with 16 months remaining, we can take measures to minimize counterproductive panic reactions. I am not advocating survivalist behavior, but rather community action to ease the impact of Y2K on all of us.

I am not predicting doomsday. There will be a recovery from the Year 2000 recession and a rebound in stock prices. A new round of prosperity will start sooner if we enter the coming millennium with our eyes open.

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Edward Yardeni is chief economist and global investment strategist for Deutsche Bank Securities in New York City.