Revenge of the Old Economy.

Judging from the statistics, the New Economy is back. Once American companies figured out how to use all that technology they bought in the late 1990s, the dividends have been huge, or so it seems. Economic growth has soared, with U.S. gross domestic product increasing at a sizzling rate of 8.2 percent in the third quarter. Productivity has exploded to a 5.5 percent annual rate since the end of 2001--twice the level of the late 1990s. Inflation is virtually nonexistent, and even the recently stalled American job machine has sprung into action. Since July, payroll employment is up 328,000. The New Economy seems to be alive and well. The story is plausible, reassuring--and wrong. Something else entirely happened.

Call it the revenge of the Old Economy. America's revival is no technological miracle but part of an age-old cycle. It's economic Darwinism--survival of the fittest. In boom times, there's enough business for everyone. But a slump triggers a shakeout. Weak companies shut down, merge with stronger rivals or lose market share. Even the survivors often cut costs through layoffs and the closing of unneeded plants, warehouses and offices. Sooner or later, higher sales and profits at the survivors restart overall hiring and investment. That's where the economy is now.

The business cycle creates some anomalies--productivity, for instance. Almost certainly, the 5 percent gains won't last. Productivity usually rises sharply in the early stages of recovery. Companies won't hire until they're certain of robust expansion. In this cycle, the severity of competitive pressures--at home and abroad--caused companies to keep reducing employment even after modest economic growth resumed in late 2001. The combination of economic growth and job losses automatically boosted productivity. As companies start hiring, productivity gains may fall.

What separates the United States from Europe and Japan is a tolerance for painful adjustment. Unlike in Japan, banks don't rescue large troubled companies; unlike in Europe, government doesn't. Americans seem to harbor an unstated faith that, sooner or later, they'll find a job. Consider: in March the economy had lost 600,000 jobs since the previous year, but that resulted from the elimination of 31.7 million jobs and the creation of 31.1 million.

The paper industry is a good metaphor for the churn in the U.S. economy. In 1997 there were 526 mills scattered around the country making everything from copying paper to tissue. Since then 98 mills have closed--a figure four times the number in the previous six years. Employment has dropped 56,000, or 26 percent. "We've downsized, we've merged--and there's been a lot of pain," says Stanley Lancey, chief economist for the American Forest & Paper Association. But despite the shutdowns, the industry's capacity remains roughly what it was in 1997: 100 million tons a year.

The wrenching cuts, not new technology, improved productivity. All the largest U.S. companies--International Paper, Weyerhaeuser and Georgia- Pacific--bought smaller rivals. The costliest plants shut, and production became more concen--trated. From 1995 to 2002, the top five producers of containerboard (used for shipping boxes) went from 44 percent of output to 71 percent, says analyst Mark Wilde of Deutsche Bank Securities; for newsprint, the top five went from 49 to 81 percent of output. "You tend to run the machines on a smaller number of products," says Wilde. "Companies get some good productivity gains just by not switching machines."

What happened in paper occurred everywhere, as dominant firms shoved aside competitors. In the past three years, Dell's share of personal- computer sales has risen from 18 to 28 percent in the United States and from 10 to 15 percent worldwide, estimates Gartner, Inc., consulting. Over the same period, Hewlett-Packard--fortified by its merger with Compaq--has increased its world market share from 7 to 15 percent. Among the losers: IBM, Gateway and Apple.