THE PARTY ECONOMY IS OVER Wednesday,November 22,2000 By ROBERT CLOW

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The nation's longest economic boom is showing increasing signs of winding down - and possibly coming to an end. Economists are still calling for strong U.S. economic growth next year, but there are also many indications of weakness.

In the markets there is plenty of cause for alarm. And at least 100 dot-coms have closed or downsized this year, with others announcing cuts almost daily.

The telecom sector is looking increasingly shaky. Michael Armstrong's AT&T is breaking itself apart, and Bernie Ebbers' WorldCom has admitted its business strategy does not work.

Corporate defaults and downgrades are ticking up, leading to worries about banks' loan portfolios. Last week Bank of America and First Union announced they were writing down a loan from consumer appliance manufacturer Sunbeam.

"For every upgrade, we have four downgrades," said Nick Riccio, a managing director responsible for corporate debt ratings at Standard & Poor's Corp. "The thing that is a concern is that you can see the trend continuing."

As a result, nervous investors are increasingly shying away from new high-yield bond and leveraged loan deals. And even investment-grade bonds, which should still be trading well in a fast-growing economy have sold off to levels not seen in years.

Meanwhile, the Dow Jones industrial average and S&P 500 are down 9 percent since the beginning of the year, while the Nasdaq has lost 29 percent.

This week, in a note entitled "Mea Culpa," Jeff Applegate, Lehman Brothers' equity strategist, and long-time bull, acknowledged that he had overestimated the strength of the stock market over the last year - although he's still sticking with his positive forecast.

And the ever-vigilant Federal Reserve Board is keeping interest rates high and threatening a further hike if inflation spikes up.

That does not mean anyone is losing faith in the U.S. economic miracle just yet.

"We are worried, but we are optimistic," said Paddy Jilek, an economist at Credit Suisse First Boston. CSFB is predicting no change in interest rates for the next year as the economy gradually slows.

Nevertheless, Jilek adds: "When the economy slows, you must be concerned. You never know when it's going to stop. If markets overshoot in response to worries, clearly it will have an impact on the real economy."

Jilek and his colleagues are watching for any slowing in corporate investment - which could indicate productivity growth was going to slow - or in consumer spending. Consumer spending has been one of the main engines of domestic growth.

But even if the U.S. economy continues to grow, it could find itself walking a tightrope. A survey of economists from Philadelphia's Federal Reserve Bank this week said the economy will grow by a healthy 3.3 percent rate next year while inflation remains tame.

But in a study released the same day, the Organization for Economic Cooperation and Development predicted the U.S. would only maintain its growth at the cost of sparking inflation. The OECD expects the Fed to tighten the reins again next year.

Energy is one factor that worries the Fed.

Oil prices continue to hover around $30 with no sign of dropping. High energy prices could slow the economy by increasing production costs, but judging from the Fed's recent comments, it's more worried that high oil prices are the result of inflated demand rather than weak supply, and it is still ready to act to dampen that demand.

Any rate hike could be bad news for the securities industry, which is already coming under increased scrutiny from analysts, and for New York City, which relies heavily on Wall Street to drive its prosperity.

Analysts including Guy Moszkowski of Salmon Smith Barney, Amy Butte of Bear Stearns and Judah Kraushaar of Merrill Lynch have been warning for a while that investment banks' earnings will come under pressure in the next few quarters.

On Monday, the stock market reacted to warnings from Bank of America and First Union by selling down the commercial banks' stocks. Then, yesterday, Merrill's Kraushaar downgraded asset managers, citing full valuations and earnings risks.

The problem for Wall Street, the main street banks and investors is that the tech and telecom boom was responsible for such a large part of their returns - and many analysts and investors now consider it over.

Moszkowski estimated in a recent report that more than 80 percent of many securities firms' underwriting calendars was New Economy business. Asset managers relied on the stratospheric returns of tech companies to drive their fund inflows.

But now even the loudest and most enthusiastic Wall Street cheerleaders are turning skeptical about tech and telecom.

Just yesterday, Merrill analyst Michael Ching downgraded telecom equipment maker Lucent, reflecting that stock's fall from a lofty height after its spinoff from AT&T.

And Mary Meeker, Morgan Stanley Dean Witter's Internet analyst - and, until recently, one of the queens of the New Economy - warned that Yahoo!, an Internet bellwether and one of the few dot-com stocks with real earnings, might miss its figures.

http://www.nypostonline.com/business/16736.htm

-- Carl Jenkins (somewherepress@aol.com), November 22, 2000