Steven Pearlstein :
©Washington Post, July 23, 2001
Shifting Cycles: New Economy Becomes the Only Economy
WASHINGTON For the past decade, the boom in
technology has driven much of the economic growth in the
United States and around the world. There was no better
symbol of that tech boom than the personal computer that
has become ubiquitous in homes, offices and
schoolrooms from Chicago to Shanghai.
But for the first time since the PC came into general use,
manufacturers around the world shipped fewer desktops
and laptops in the spring than they did the year before.
International Data Corp. and Dataquest Inc., the two
research firms that keep track of such things, estimated
the decline at 2 percent and said the slump could continue
at least through the summer, if not through the end of the
year.
It is not just PCs either. Early estimates are that shipments
of cellular telephones and personal hand-held devices -
two of the technology sector's hottest products - also
slipped last quarter.
As a result of years of discounts and promotions, the
world has become saturated with high-tech gadgets. And
without any new breakthrough products or services in the
pipeline, many businesses and consumers seem content
to hang on to stuff they have.
Economists are wrestling with how to factor this boom and
bust into their outlook for the U.S. and global economies.
Until recently, the "tech cycle" and the "business cycle"
were largely independent of each other. The tech sector
was so small that its booms and busts did not significantly
affect the direction of the overall economy. And because
technology gave businesses the tools to improve
efficiency and increase sales, companies tended to invest
in it through good times and bad.
But in the past decade, the technology sector seems to
have had an outsized effect, suggesting to some
economists that a full-fledged economic rebound will not
begin until the technology cycle turns up.
"The tech cycle is such a big dog now that if you can't get
that moving, the rest of the economy will likely be very
weak," said James Paulsen, an economist and chief
investment officer at Well Capital Management in
Minneapolis. "Technology has assumed the importance
today that the auto industry had during the 1950s and
'60s."
Mr. Paulsen calculates that in the late 1990s, the tech
sector accounted for as much as half of the growth of the
U.S. economy, both directly, through the output of
high-tech companies, and indirectly, through the increased
efficiency of the companies that used it and the wealth it
created for employees and stockholders. At the same
time, technology stocks were rising so quickly that they
dragged most of the major stock indexes with them,
despite the fact that most of the other stocks in the
indexes were either treading water or falling in value.
"If it weren't for the technology boom," Mr. Paulsen said, "I
would argue that the U.S. would have gone into recession
after the Asian financial crisis in 1998."
Other analysts argue that it was no coincidence that the
economic downturn began following the bursting of the
dot-com bubble - not because those companies
represented such a large portion of the economy, but
because old-line businesses that had been spending
furiously on Web sites and e-commerce strategies began
to let up once their survival was seemingly no longer at
stake.
"The perception of the speed with which the economy
would adapt to the Internet changed when the dot-coms
busted," said Stephen Minton, an analyst with the
Framingham, Massachusetts-based technology research
firm IDC. "Companies began to reevaluate what they were
already doing."
The death of the dot-coms, however, was only the first
blow to the technology boom.
With stock prices falling and long delays in providing
broadband Internet service to many parts of the country,
Internet companies stopped providing the big discounts
for home computers that they had offered in the hope of
quickly building customer bases for the new broadband
services they were planning.
And with no new "killer applications" or revolutionary new
microprocessors coming along from software and chip
makers, businesses found that instead of replacing
desktop computers every two to three years, they could
wait three to four years, Dataquest said.
Meanwhile, faced with delays in introducing
next-generation cellular service in the United States,
phone companies stopped offering the free telephones
and deeply discounted rates they had offered customers
just for signing up. As a result, the average time it took for
customers to switch from one cell phone to another
jumped from 12 months to 24 months, according to an
analysis done by Philips Electronics NV, a major supplier
of cell phone components.
Such bumps on the road are common in the technology
cycle. What was significant this time was the effect it had
on the overall economy.
"One explanation for the current downturn is that
technology, broadly defined, is going through a
self-inflicted contraction," said Gail Fosler, chief
economist of the Conference Board, a business research
organization.
"After years of tremendous advance, the pace of
innovation appears to have slowed," she said, adding:
"The so-called dot-com boom appeared to promise
technology on demand when, in reality, even with today's
stunning advances, there are periods of drought in the
technology pipeline."
Not all economists agree that technology has become the
tail wagging the economic dog. David Wyss, chief
economist at Standard Poor's Corp., said that technology
sector employment, for all its growth, still represents only 5
percent of the U.S. work force. And unlike industries such
as auto and housing, the technology sector has relatively
little direct effect on output in other industries. Mr. Wyss
says it was likely that the U.S. economy would rebound
next year even if sales of computers and cell phones did
not.
A recent study by the International Monetary Fund,
however, suggests that the importance of the technology
sector extends well beyond its share of employment. In its
World Economic Outlook in May, IMF economists
reported that the rise and fall of technology stock prices
had been a fairly reliable economic bellwether for the past
decade, not only in the United States but also in Europe
and Asia. The authors of the study hypothesized that was
because the share prices of technology companies had
an outsized impact on consumer spending and business
investment.