Bank investors are awaiting official data scheduled to be released on Thursday that will hint at the degree to which the economy might slow as it reacts to year-2000 computer problems.
Some economists are predicting a decline in economic activity, whether the year-2000 problem proves to be serious or insignificant.
Forecasters say the economy expanded at a 4% to 5% real annual rate during the third quarter, spurred by businesses' protective inventory building and expenditures to cope with the date change. Without these twin stimuli, growth next year could be sharply reduced.
And that could mean a shift in Federal Reserve monetary policy, from the current credit-tightening stance that has hurt bank stocks to a neutral stance or even easing. Bank and financial shares are always among the biggest beneficiaries from prospects of lower interest rates.
Economist Gary L. Ciminero, an independent forecaster based in Providence, R.I., says real economic growth will finish the year in the 3% to 4% range, "followed by a mere 1% to 2% pace for early 2000." Many economists say the Fed has been aiming for a 3% annual growth rate in gross domestic product as the most sustainable noninflationary level.
But almost nothing surrounding Y2K can be predicted with any certainty because it is a unique event. And many details about preparations and costs associated with the date turnover remain murky.
"Hard data remain hard to find on the true readiness of vitally important public and commercial computer systems around the world. Almost all progress reports cannot be independently validated and verified," said Edward Yardeni, chief economist at Deutsche Banc Alex. Brown in New York, who has studied the issue extensively.
The vulnerability of such systems was highlighted Wednesday when a computer glitch at Charles Schwab & Co. halted on-line trading at the nation's largest discount broker for nearly two and a half hours. The same day, International Business Machines Corp. jolted investors by warning of weak earnings because many customers are delaying purchases of computer equipment until assessing whether their Y2K fix-up efforts have worked.
"I'm not sure that just because on Jan. 1 the lights are still on would mean all the problems are behind us," said Frank W. Anderson, an independent bank analyst based in Dallas. "The concern is that we could see gradual breakdowns and other effects."
Mr. Yardeni is still forecasting a recession next year, with real declines in economic growth in the first three quarters of 2000, but he is among the few to make such a prediction. Most see a slowdown whose length and depth are difficult to measure, in part because advance costs associated with Y2K have been so difficult to measure.
Estimates of Y2K-related expenditures range from $50 billion to $100 billion for the U.S. private sector, plus an additional $20 billion for the public sector, or up to 18% of the economy's growth over the past four quarters.
But these estimates cover only the initial impact on the economy, noted Van R. Hoisington and Lacy H. Hunt of Hoisington Investment Management Co. in Austin, Tex.
"Multiplier calculations would infer that such items as advertising, packing, shipping, additional labor, purchasing of sub-component parts and other items could swell the Y2K impact to as much as 25% of the growth in GDP over the past year," they said. "The frenetic pace to correct the problem is also apparent around the world.
"The risk is that as computer systems become compliant, expenditures will fall off domestically and globally," they said. "The multiplier effects will turn negative from such a falloff and could possibly subtract as much as 25% from future growth in the year 2000."
Mr. Yardeni said the risks of trouble are not concentrated in the banking system, electric power grid, or telephone network. Instead, he is concerned "about weak links in global supply chains, especially as they might disrupt global just-in-time manufacturing and petroleum production and distribution."
The impact in the market could be similar to the strains of August and September 1998, when counterparty risk spreads widened sharply after a Russian financial default, he said. Banking and financial stocks fell sharply in that period until the Fed stepped in to lower interest rates.
Mr. Yardeni said there is too much complacency about global Y2K progress, readiness, and compliance, and that only a few major Y2K disruptions would be enough to puncture that "irrational confidence."