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. Last Updated: 07/27/2016

'90s Boom Ended 'With a Bang'

WASHINGTON -- The president was George Bush, the nation was coming out of a short war and a weak economy was showing faint signs of life.

Things weren't so different in March 1991 as they would be over a decade later when a panel of academics would officially pronounce the longest economic expansion in U.S. history had come to an end in March 2001, exactly 10 years of age.

In 1991, the president was George H. Bush, father of the current inhabitant of the White House. The war was the Gulf War, a conflict that featured a 100-hour ground campaign. And economic policymakers were beginning to feel cautiously confident that the economy, which would later be judged to have hit a bottom in July 1990, was on its way back.

"I'm optimistic," then-U.S. Treasury Secretary Nicholas Brady declared in a televised interview March 24, 1991.

U.S. Federal Reserve Chairman Alan Greenspan was also somewhat upbeat.

"By far the highest probability at this stage seems to be that the healing process that we've been observing in recent weeks will continue and will gradually lead into a bottoming out and an economic upturn," Greenspan told his Fed colleagues at a March 1991 meeting.

But while Kevin Costner's epic "Dances with Wolves" was winning Academy Awards and a song titled "Smells Like Teen Spirit" was hitting the airwaves, the groundwork was being laid for the long boom.

Initially, the economic recovery was considered relatively weak as unemployment remained stubbornly high.

"It got off to such a slow start and ended with sort of a bang," Robert Dederick, an economic consultant with the Northern Trust Co. in Chicago, said of the record expansion.

As the decade progressed, joblessness fell dramatically and a debate arose over whether the United States now had a "New Economy," one that could grow faster for longer periods without inflation than in the past because of improved productivity brought about by high technology.

The argument over the economy's speed limit took a new turn in 1994 when the Fed, sensing the economy was growing too strongly, embarked on a series of interest-rate hikes.

The belief in a New Economy sent the stock market soaring in the mid-90s, which in turn prompted Greenspan to utter his famous worry over "irrational exuberance" in equity prices.

But Greenspan's warning would appear off the mark for several years. The economy shook off various global crises, including currency woes in Asia and an unexpected default by Russia on its debt.

By the late '90s the boom was in full swing, and the Fed, which had left rates relatively steady for several years, stepped in in mid-1999 and began raising rates to cool the economy. Despite the Fed's actions, the economy posted its strongest showing of the expansion in the final three months of the year, roaring ahead at an 8.3 percent pace.

The central bank continued to raise rates well into 2000, even as stocks dropped from their peaks in the early part of the year, making Greenspan's warning seem prescient.

"He was not the one who was irrationally despondent. We were the ones who were irrationally exuberant, and eventually it caught up with us," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

While the Fed reversed course in January 2001 and dropped interest rates, the economy had already begun slowing. Still, without the effect of the Sept. 11 attacks, some economists believe it is unclear whether the United States would be in recession.

Another legacy of the '90s will be the debate over the importance of a balanced budget to the economy's health.

Unlike the expansion of the 1980s, which saw federal budget gaps soar, the government saw an improving fiscal picture throughout the 1990s as policymakers sought to rein in deficits.

Gene Sperling, an economic adviser to former U.S. President Bill Clinton, said policymakers feared what he called a "start-and-stop economy," where signs of growth would push long-term interest rates higher, thereby sapping the economy's strength.

The solution was to lower the deficit, thereby easing pressure on market-set interest rates, Sperling said. "I think time has shown that both the diagnosis and the prescription were appropriate."

Dederick, however, said the deficits came down, eventually turning into surpluses by 1998, because the economy did so well. A good economy brought the budget into balance, he said, not the other way around.