EconSouth (Fourth Quarter 2000)


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Living in an 800 MHz Economy

Computers are a big deal. To be convinced, just think about how much money U.S. businesses spend on them. Through the first nine months of 2000, the Bureau of Economic Analysis estimated that, out of the approximately $780 billion spent by U.S. businesses on all types of equipment, over one-third was devoted to computer and software purchases.

Moreover, the share of equipment expenditures going toward computing power has increased during the past decade. Since 1992, annual expenditure growth on general industrial machinery averaged 7 percent. In contrast, dollar expenditures on computer hardware increased at an average annual rate of 12 percent between 1992 and 1999 and by over 20 percent during 2000. At the same time, outlays on computer software increased at an average pace of 10 percent from 1992 to 1996 and at over 20 percent annually since that time. While much of the ramp up in software expenditures in the late 1990s was related to Y2K preparation, Y2K investments in many cases also provided firms with an opportunity to improve upon outdated technologies. Interestingly, growth in both computer and software spending for 2000 remained strong.

Better, faster, stronger
Computer technology has also been an important source of real growth in the U.S. economy. Since 1995 computer and software spending has contributed an average of eight-tenths of 1 percent to quarterly real gross domestic product growth, more than doubling computer and software’s average contribution between 1992 and 1995. Indeed, much of the productivity surge in nonfarm business witnessed over the latter 1990s is attributable to computers. This surge is related not just to productivity advances and quality improvements in computer manufacturing, which have clearly been an important part of the story, but also to the fact that workers in a wide range of businesses use improved or more efficient technology.

John Robertson

How recent experience is different
The current combination of productivity and wage gains with relatively low inflation stands in stark contrast to the economic conditions in the 1970s. During that decade, an inflationary wage-price spiral occurred while productivity gains were low and labor costs per unit of output were increasing rapidly. In the 1990s and into 2000, higher labor productivity has been an important noninflationary source of strong wage growth. Unlike the 1970s, increases in unit labor costs have largely been balanced with labor productivity gains.

On the horizon in 2001
But some developments could upset this balance. For instance, between 1996 and 1998 the prices for computer hardware decreased around 25 percent annually, but in 2000 prices declined by only 10 to 15 percent. This development could slow the pace of investment in information technology. In addition, the price of software has been rising for the first time since 1996 and at a pace not seen for almost 20 years.

If these price trends continue in 2001, they could erode real investment growth unless businesses allow nominal outlays to increase even more rapidly. The most likely scenario is that expenditures on computer-related equipment and software will continue to be strong in 2001 even if growing at a slightly slower pace than in 2000 as firms continue to seek ways to increase productivity and control costs.

By John C. Robertson, assistant vice president of regional research of the
Federal Reserve Bank of Atlanta

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