From Morgan Stanley, more possible E-commerce stuff!
I believe the technology-driven capital spending boom has finally
ended the "productivity paradox." Courtesy of the breakthrough
"shared infrastructure" of the Internet, the technology boom has begun
to raise the economy's speed limit to 3%. However, this new limit
isn't guaranteed-I believe tht it hinges on a continued, intense
technology boom.
The good news: The boom is gathering strength. In my view, IT's
two defining characteristics-continuously falling prices and the
continuously growing value of the Internet's shared
infrastructure-assure that technology demand will continue to outpace
significantly the rest of the economy at least for the next few years.
Indeed, Morgan Stanley Dean Witter technology analysts believe that e-
commerce imperatives will likely sustain strong hardware, software and
telecommunications equipment demand for the foreseeable future,
overwhelming any temporary, Y2K-related slowing.
Technology's global spread is a secular development, and it
hasn't exterminated cyclical forces than can push up inflation or
create economic imbalances. But its spreading use has helped dampen
cyclical fluctuations and has made the economy more sensitive to price
signals.
DETAILS:
America's infatuation with Information Technology has never been at
such a fever pitch. Outlays for IT equipment, software and IT
services are running at a $500 billion annual clip, or 5.7% of nominal
GDP, and that figure doesn't include compensation for the army of IT
support workers, much less the $1.5 trillion in wealth created by the
rise in technology stock prices over the past year. Yet the debate
over the economic payoff from this technology boom has never been more
intense. While it is important to recognize that true shifts in
economic trends are slow to emerge, we believe that the jury has now
come in to render a verdict: The "productivity paradox"-sluggish
productivity growth in the face of rapid advances in and rapidly
growing use of information technology-is ending.
Yes, the boom in information technology has finally begun to pay off,
boosting productivity growth to about 2%, and thus the economy's
noninflationary speed limit to roughly 3%. This improvement
represents more than the typical cyclical pickup in productivity
growth that accompanies an acceleration in the economy. And it
represents more than just the explosion in productivity in the
industries that make this high-tech gear.
Two factors explain why the shift is at last now occurring: First, I
believe company strategies that use information technology to cut
costs, such as "just-in time" inventory management techniques, are
paying off in a significant way. Second, and more important, using
computers for many business functions didn't really pay off until they
could exchange information easily using the Internet's "shared
infrastructure"-sharing costs among all users avoids both the costs
and the risks of investing in the quickly-obsolete proprietary systems
of the 1980s and early 1990s. The Internet made possible the
explosion in business-to-business (B2B) commerce, which is just
gathering steam. And the upsurge in telecommunications capacity
should accelerate the process by making it cheaper. While we don't
capture the direct revenue or market impact of such strategies in this
analysis, I believe that the imperatives of e-commerce are driving the
booming demand for and economic impact of IT hardware.
These aren't just one-off improvements, because technology is
reshaping business strategies. Just as important, however, these
developments carry with them three critical caveats. First, the
resulting higher economic speed limit is not an eternal economic
constant. The high-productivity economy is a hungry machine, and will
have to be fed with continued rapid increases in high-tech investment
to sustain the higher rates of productivity growth. In that sense, a
self-sustaining, faster rate of improvement in our living standards is
far from a foregone conclusion. Fortunately, technology spending
growth seems likely to remain strong, as long as the promise of
further improvements and the lure of cheaper gear continue.
The second caveat is even more fundamental. A higher speed limit does
not mean that there are no speed limits. Far from it. Any
disinflationary dividend from the boost to productivity is a secular
development, recently amplified by the cyclical disinflationary
effects of the global financial crisis. The two swamped potential
inflation pressures resulting from three years of growth above the
economy's now-higher, sustainable pace. But our global healing story
is all about cyclical improvement in the global economy. As it
recalibrates inflation expectations to precrisis levels, those dormant
inflation pressures likely will slowly resurface.
A final word of caution: Recently, productivity has accelerated to a
rate that tempts an even more favorable conclusion about the economy's
speed limit. New estimates of GDP imply that nonfarm business
productivity rose by an average 2 1/4% per year over the past five
years (vs. 1.7% previously) and nearly 2 3/4% in the past two years.
Moreover, estimated as gross domestic income per hour rather than real
gross product per hour, productivity over the past two years rose by 3
3/4% percent at an annual rate. Is the speed limit thus as much as 3
1/2% or even higher? We doubt it. The evidence we consider in the
latest Inside the U.S. Economy seems broadly consistent with 3%.
This nuanced view hardly resolves the technology-cum-productivity
conundrum, but I had no expectation of finding the grail when I set
out on the journey. Our position is cautious compared with the
sweeping optimism of the "new paradigm" analysts who believe that the
digital revolution has ushered in an era of inflation-free growth. On
the other hand, our view seems to stand in contrast with Steve Roach's
belief that the productivity paradox is alive and well in the U.S.
economy. Yet Steve and I strongly agree about two things. First, the
accelerating pace of technological innovation will reshape the U.S.
and global economies, and both Europe and Japan seem poised on the
cusp of a technology spending spree that will rival our own. And
second, U.S. companies are perfectly positioned to benefit from this
global boom as it unfolds.
Note: This is an excerpt from "The Technology Boom and the U.S.
Economy: Paradigm Found or Paradox Revisited" in Inside the U.S.
Economy, November 8, 1999. Please contact your Morgan Stanley Dean
Witter representative for a copy or locate one on Client Link at
www.ms.com.
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