“The dominant image of the stock market tumble that began nearly three years ago has been a bursting bubble. And while it was true that the worth of many companies was inflated beyond all reason, it turns out that deflating those valuations did not immediately reveal all the damage,” writes Floyd Norris in today’s New York Times.

“Instead, the decline in stocks took its time in damaging the economy, much as a domino near the end of a line can topple long after the first ones fall.”

“The first pain was felt by millions of investors, who lost billions but proved surprisingly resilient. The fact that consumers kept spending helped keep the 2001 recession mild.”

“But it soon became clear that sales at companies that had prospered most during the boom, notably telecommunications concerns, were going to remain depressed. Forecasts of an early revival were consistently wrong, and now some companies have put off their hopes for growth until 2004.”

“Only in 2002 did it become clear just how far this string went — from the federal government to city halls. Governments had been dependent on the revenue-producing effects of the bubble — particularly income taxes on profits from cashed-in stock options. Now state and local governments are being forced to reduce spending sharply and raise taxes, moves that will slow the economy.”

“What’s left to tumble? Consumer behavior is the area that many economists are watching. Reports of disappointing Christmas spending could be an indication that high debt levels are finally slowing purchases. But housing remains strong, and thanks to low interest rates, most consumers have ample income to pay interest charges on the money they owe.”

“Productivity numbers have remained strong, providing a source of reassurance that the economy remains healthy. But it is possible that the good news could end in 2003.”

” ‘If the productivity numbers reflected the wild and excessive investments,’ said Robert J. Barbera, the chief economist of ITG/Hoenig, a Wall Street firm, ‘productivity might begin to fade’ since bubble-related capital spending has collapsed. He said some research showed a two-year delay in the impact of investments on productivity numbers.”

“And then, of course, there are signs of a weakening dollar, high oil prices and the prospect of war with Iraq, with a possibly messy aftermath, to give investors pause.”

“But to some bulls, the real issue is not so much whether the economic outlook is bright, but whether share prices fell far enough to more than compensate for the remaining risks. There were signs within the market, including widespread bearishness and a big increase in volatility, that a turning point was reached when stocks bottomed on Oct. 9.”

“There are also historical precedents. It’s been seven decades since the last time the market went down in four consecutive years — as would happen if 2003 turned out to be a bad year. And it has been more than six decades since the third year of a presidential election cycle brought lower share prices.”