The longest economic expansion in US history is over. Personal and corporate bankruptcies are rising, as is unemployment, while the Nasdaq has tumbled. Making matters worse, terrorist attacks have introduced an extra degree of uncertainty. Instead of offsetting these developments, European and Asian markets, for the first time, are moving in lockstep with those in the United States.

Many observers see the collapse of the Japanese stock market at the end of the 1980s, following a decade of economic exuberance, as a forerunner of March 2000 in the United States. Japan is still suffering from the deflation of its stock market bubble. Is the United States too facing more than a decade of economic stagnation?

We at the McKinsey Global Institute (MGI) believe that such worries are unfounded. Certainly, some of the stock market euphoria of recent years wasn’t justified. Still, the underpinnings of the US economy—unlike Japan’s—are fundamentally sound. Twenty-five years of deregulation, healthy competition in most sectors, and a renewed tradition of entrepreneurship have made the US economy stronger than ever.

A new MGI study of US labor productivity confirms this belief. Between 1995 and 1999, labor productivity, the basis of the US standard of living, grew...