Real GDP growth is expected to be well above 4 percent in 2000, with moderately slower growth of 3 to 3.5 percent projected for 2001.

Industrial production is up, inflation is still under control and unemployment is hovering at around 4 percent, almost a postwar low. Indeed, in the high-tech sector there is a shortage of skilled workers, only partially alleviated by importing workers from other countries.

Despite the roller-coaster-like behavior of the Nasdaq and Dow, money is still flowing into the stock market-albeit in a more selective fashion. As of May 2000, the U.S. economy will have expanded for a record 110 consecutive months-an amazing feat by any standard.

Yet, the transition to a more moderate pace of economic activity has begun. The economy grew at a 5.4 percent annual rate in the three months to March 2000, down from 7.3 percent in the fourth quarter of 1999. The pace is expected to drop again in the third quarter, when domestic spending is likely to slow down from its breakneck pace of late 1999 and early 2000. Housing starts have already peaked, and small companies are beginning to fare less well than their larger competitors in terms of earnings performance. As Moody's economist John Lanski recently noted, "In the final quarter of 1999, U.S. nonbank companies having quarterly sales in excess of $1 billion recorded a 14.7 percent annual advance by recurring profits. At the same time, the recurring profits of nonbank companies having less than $1 billion of quarterly sales dipped by 0.2 percent annually."

The advent of higher interest rates and April's stock market gyrations signal a new phase for both new- and old-economy companies. Inflation has again become a concern at the Federal Reserve, and interest rates will climb in May and probably at least twice more, once more in 2000 and again in early 2001. Labor shortages, which push up wages in key sectors such as high tech, along with higher oil prices could lead to inflation. Additionally, consumer spending remains high. The first-quarter 2000 results featured the strongest consumer spending in nearly nine years, as well as robust business investment.

Higher interest rates and tougher market conditions will make access to capital more difficult. This situation is already causing some venture-capital firms to reassess their strategies, especially with regard to the less economically viable new-economy companies. Those companies will be forced either to restructure with an eye to cost-effectiveness or face buyouts. Still others will look to merge with like-minded companies or risk bankruptcy. Further, new-economy companies considering going to the Nasdaq must now consider investors' heightened concerns about profitability, business plans and forecasts. That applies to domestic U.S. companies as well as overseas companies.

Equally significant is the transition of old-economy companies into new hybrids. To survive in the new economy, old-economy companies are catching up by introducing new technology and adopting new management techniques to attract and retain the right people. Old-economy companies actively engaged in this process include Allstate, the insurance company and Xerox, the copier maker. Both companies have undergone radical restructuring in recent years in order to compete in the new economy.

Despite signs that the U.S. economy is slowing, considerable vitality remains. Industrial capacity utilization rates are comparatively low-overcapacity clearly is not a problem.

Growth is slowly returning in Japan, and European economic activity is accelerating. Those trends are good for U.S. exports, and higher interest rates-a major trend in the United States-will also help maintain the flow of capital into the United States, especially from Europe.

At the same time, the Fed must be careful not to thwart economic growth by raising rates too quickly. Although public finances are in relatively good shape, private-sector debt-both corporate and private-stood at an onerous 134 percent of GDP at the end of 1999 and probably has increased since then. If rates are raised too rapidly, they could precipitate a rash of bankruptcies, both corporate and personal, which could nudge the economy into a "hard landing." Though we do not expect this scenario, it cannot be entirely dismissed as a concern.

Even with the U.S. economy heading toward a soft landing, the new economy is unlikely to disappear. In a sense, we are in our own Modern Times. New technologies, industries, products and services will continue to appear.

There is a simple law of gravity that states that what goes up must come down. That was true for the old economy, and it is equally true for the new, even in these Modern Times.