Bugged By Y2k?

IS THIS AN ASTEROID OR WHAT? WILL IT CRASH INTO THE planet or burn out before impact? No, not President Clinton's Monica story, but the other favorite focus of incendiary gossip: the Millennium Bug. As anyone not in deep purdah knows, many computers don't recognize the 21st century. They read "Jan. 1, 2000" as "Jan. 1, 1900," because their original programmers didn't arrange for "19" to roll into "20." That little mistake--often shorthanded as Y2K (year 2000)--could cause anything from minor mischief to big trouble when the millennium turns. Some computers will stop. Some will give answers that are wrong. Unknown billions of dollars are being spent on repairs.

We know that every system won't be fixed on time. What we don't know is how much that's going to matter. Businesses, consumers, government agencies, hospitals, high-rise buildings, public utilities--all are vulnerable. In the best case, data jam-ups will be only a nuisance. In the worst case, serial, crashing computers will damage commerce so badly that companies lay off tens of thousands of workers and a recession ensues.

Single question: Investors contemplating the risks have a single question--should I sell my stocks? Even if you don't believe the end is nigh, other people might. If they're going to send the market down, should you sell now, before the rush?

How you answer that question depends on how hard you think the Bug might bite. Naturally, well-informed opinions differ.

Longtime Y2K agitator Edward Yardeni, chief economist for Deutsche Bank Securities in New York, puts the odds of a global recession at 70 percent. The pace of repairs is too slow, he says, and there are too few contingency plans. He's looking for stocks to fall by about one third, starting sometime in the next 12 months.

For the muddle-through view, there's PaineWebber's chief investment strategist, Edward Kerschner. He sees glitches, disruptions, losses at some firms and a few small-company failures--but no recession. In fact, he expects a Y2K dividend. Many corporations are buying new and more efficient computer systems, he says, which will boost productivity, long term.

This year and next, heavy, Y2K-driven purchases of hardware and software will add a bit to U.S. growth, says David Wyss, chief economist at the forecasting firm Standard & Poor's DRI. Those purchases borrow from the future; buying will fall back in 2000 and 2001. But it's not a big deal, either way. Cumulatively, Y2K will cost the country 0.5 percent in growth, Wyss says--about as much as the loss this year from the Southeast Asia crash.

At the Gartner Group in Stamford, Conn., a top technology consultant, the assessment is more positive than not. Gartner surveys a representative group of companies and government agencies in 87 countries every three months, and agrees with Yardeni that many of them got started on their problems late. Research director Lou Marcoccio thinks that 30 to 50 percent will have at least one critical failure, meaning that an important system will shut down. But before you panic, hear what else he says: 90 percent of those failures will last less than three days, "so they won't stop the world from turning."

Just trucking: There's no precedent for Y2K. Whether to truck with the Pollyannas or the Cassandras may be a matter of temperament. But at least we know that brief jolts to business don't have to turn into something worse. Companies have managed their way through paralyzing, weeklong storms, power blackouts, transportation halts, telephone shutdowns and foreign economic alarms. During the three-week government shutdown in December 1995, federal spending collapsed--yet in the quarter, the economy grew at a decent rate of 2.2 percent.

The money and worry time expended on Y2K will pick up rapidly over the next 16 months. The financial industries--banks, insurance companies, mutual funds, brokerage firms--are expected to make the deadline. Ditto the big utilities, although all the lesser ones haven't been accounted for. AT&T says its Y2K problems will be solved by the end of this year. Social Security is ready. The government even seems to be getting a handle on air-traffic control.

Many businesses already operate in the 21st century--making loans, writing leases, taking orders. As the months advance, more and more systems will reach into real, '00 time, forcing companies to adjust. Problems addressed now means fewer millennial risks.

Nevertheless, there are dangerous holes in our understanding. Have cities and counties checked out their water and power systems? Will production be interrupted at Y2K-compliant businesses because key suppliers failed? Will business disruptions push consumer prices up (sudden inflation often leads to recession)? Why aren't the insurance companies that cut Medicare checks more on the ball? And how about the billions of microchips buried in automated equipment? A small percentage of them contain noncompliant calendars. Users haven't a clue.

We know less, and worry more, about the rest of the world. But even in developing countries, the outlook isn't quite as dire as you might think. Most major Asian banks are newly automated, hence compliant, says a recent report by the brokerage firm Merrill Lynch. The same goes for many newly privatized companies in Latin America. Port facilities are pretty new. The world's central banks stand ready to make emergency loans where financial transactions can't close. If necessary, the Fed will kick up the money supply to cover the people who'll want extra cash on hand.

Even so, will stocks fall? Maybe--but markets soon overcome transitory disruptions, if that's what Y2K turns out to be. We don't have enough hard data now, which plays into the hands of people who say the system will come to a halt, says John Koskinen, head of the President's Council on Year 2000 Conversion. By next spring we'll know more, as more systems are tested and businesses lay contingency plans. Stay tuned.