Morgan Stanley's Global Economic Forum assesses the state of the tech sector. I broadly agree, save for one important matter of emphasis. They view low prices for information technology goods as a bad thing--it robs IT producers of profits. I view it as a good thing: look at all the great stuff that IT purchasers are getting cheap!

Given that we have overcapacity in IT-producing industries, the market ought to be sending the rest of the economy the signal that the capacity to produce IT is really abundant, hence you should be buying a lot of it. That's one of the things the market economy does well--to push down the price and thus expand the quantity demanded in industries that have overbuilt. And that's what the market economy is doing.

Morgan Stanley: ...Demand growth isn't the problem; at least the way economists look at it, the IT recovery is real. Adjusted for inflation, we estimate that US computer and software outlays posted their first double-digit year over year gain last quarter -- rising by 11.5%. And it appears that investment in computers alone may have risen even more strongly, with nominal shipments up 11.6% in the year ended in August. This spending is strong evidence that the "overhang" of IT investment is largely gone, and companies are at least replacing fully depreciated gear. For their part, consumers are also contributing: Real consumer purchases of computers and peripherals rose by 32% in the year ended in August.

But there are three hurdles to strong growth in nominal IT company revenues. First, IT prices generally are falling as fast as volumes are rising, so IT revenues are barely increasing. For example, producer prices for computers and related equipment fell by 20.5% in the year ended in September. In addition, telecommunications companies glutted with capacity continue to slash capex. In the year ending in August, telecom equipment shipments fell by 20%, and new orders fell by 11.6%. Finally, overseas demand is faltering, adding to the pain. My colleagues Joe Quinlan and Rebecca McCaughrin note that the real culprit in the widening US trade gap this year is not so much rising import penetration but fading US exports, especially to Europe and Latin America (see "America's New Trade Villains," Global Economic Forum, October 18, 2002).

But demand would have to be growing much more strongly to offset the fundamental problem in technology: excess capacity, and by implication, little concern with the return on invested capital. Many IT companies keep investing as if a boom lies around the corner, and all they need is a healthier economy to bring back 1990s-like growth rates. Consequently, IT utilization rates are so low -- 10 to 20 percentage points below other industries' -- that they truly have no pricing power. For example, according to Federal Reserve data, operating rates in computers and office equipment in September fell back to 65.4%, fully 15.3 percentage points below the 1967-2001 average. And in communications equipment, the utilization rate fell to an all-time low of 49.9%, 30.2 percentage points below the '67-'01 mean...