October 29, 2002
Optimism with Respect to the Technology, Pessimism with Respect to Its Profitability

Optimism with Respect to the Technology, Pessimism with Respect to Its Profitability

Take a look at what the Commerce Department's Bureau of Economic Analysis says about the pace of investment in computers and peripherals--both "nominal" investment (how many dollars are spent) and "real" investment (what those dollars buy in terms of computers and peripherals of the quality and performance made in 1996).

If you haven't been looking at these numbers or their like recently, they do surprise you:

Some salient observations:

  • In the second quarter of 2002, our real rate of investment in computers and peripherals was 20.7 times as much as when George H.W. Bush took office in the winter of 1989.
  • Real computer investment today is higher than at any time in history--6.1% above its previous all-time high reached at the peak of the late-1990s boom and bubble.
  • During the recession real investment spending on computers and peripherals declined by 12.3% from its peak in 2000:III to its trough in 2001:III.
  • Since its trough, real investment spending has risen over the past three quarters by 21.0%

These make you optimistic about the technology, no? The collapse of the internet bubble and the recession led to no more than a minor decline in real investment in computers and peripherals. We are now installing more computer power than ever before--a clear sign that even with all the economic and political and business model and intellectual property uncertainties, businesses are finding the things that computers do for them very valuable. They will continue to transform our economy and our world.

But there are some other, alternative salient observations:

  • Nominal investment spending on computers and peripheral reached a peak in 2000:III.
  • Thereafter it precipitously declined for four quarters, declining by a total of 29.4%.
  • Since the trough, nominal investment spending has risen by only 7.7%--leaving us 23.9% below our all time investment spending high.
  • It is true that nominal investment spending now is higher than at any time before 1997:I. And it is true that in the second quarter of 2002, our nominal rate of investment in computers and peripherals was 1.8 times as much as when George H.W. Bush took office in the winter of 1989.
  • But relative to the size of the economy's total spending, investment spending on computers and peripherals is no larger a share of GDP than it was in the late 1970s.

These make you pessimistic about the profits of computer companies, no? Fifteen years of fire and technology and yet computer and peripheral manufacturers attract no larger a share of total GDP in spending on their products than they did back in the days of Ronald Reagan.

All these numbers are from the Commerce Department's Bureau of Economic Analysis's National Income and Product Accounts database.

Posted by DeLong at October 29, 2002 04:43 PM | Trackback

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I found the graph a bit confusing since the 'real' series was deflated by a computer-specific price index rather than the CPI or similar.
I'd find the discussion more helpful if the 'real' series were labelled something like 'quantity index', and if the nominal series were replace with a CPI-deflated series.

Posted by: John Quiggin on October 29, 2002 10:16 PM

two points:

1. Lots of the equipment manufactures are heavily indebted, with debts that have to be paid back in money rather than processor cycles (I realise that this point is somewhat orthogonal)

2. The entire increase in real investment is due to the estimated productivity number, which is a very soft number indeed, and which is unhelpfully dominated by clock speeds.

Posted by: Daniel Davies on October 29, 2002 11:38 PM

Productivity growth and profit margin decline are clear indications of a structural adjustment and near arrival of a substantial technology constellation that drives value creation across sectors. Unfortunately, there will be pain in the near term.

Posted by: Zack Lynch on October 29, 2002 11:50 PM

I am not buying this argument.

First of all, nominal investment has stayed the same while 'power' has gone up. What is that really telling us? Do companies want to buy more power for the same price? No. I think companies would like to buy the same power available in 2000 for a lower price, but cannot find it in the market

Secondly, the fact we have more powerful computers today than, say, 2000, has benefited us - how? processor utilization in the bulk of the new 1.8ghz machines is probably no greater than perhaps 1-2%, (and this is when they are actually turned on). Where they are more heavily used, it is for non-productive pursuits, like games.

I think we are being fed this myth of productivity growth simply because we can get faster processors and more hard disk space cheaper. It is not how much a computer costs or the potential bang for the buck. It is about how much time does it save for us and how do we use that additional time.

Does anybody want to seriously argue that 75% of home computers today are used primarily to surf the web, a pursuit where there is no real difference between a Pentium 4 at 1.8ghz and a Celeron.

Posted by: Suresh Krishnamoorthy on October 30, 2002 07:56 AM

Shocker! Doesn't anyone have a link to the source, please?

Posted by: on October 30, 2002 10:43 AM

How does IT service spending look like in nominal as well as real terms? I believe we owe a good deal of actual productivity realization to intelligent and effective application of both e-commerce and SAP type of softwares. If these services are drastically cut down on (as personal accounts from people working in the industry suggest to me) then a lot of the productivity increases we are thinking of are going to stay potential for quite a while.

And when IBM buys the consulting arm of PWC, I don't take it as good news for the price of these services in the coming future. Especially since the idea is a combination of horizontal AND vertical concentration in this sector. And IBM is not alone moving in this direction. It's good news for profits in the sector though but that's a different story.

Posted by: Jean-Philippe Stijns on October 30, 2002 01:44 PM

I bought a Compaq w/ 17 in. monitor this summer to replace an aging Micron. I paid $700 at an office supply store.

PCs at all levels are now a commodity. Don't fight it. PCs were the last big thing. Look somewhere else for the next big thing.

Posted by: Fred Boness on October 30, 2002 03:09 PM

So why wasn't Q4 1998 seen as an inflection point and perhaps time to slow down with the exuberance?

Posted by: Brian on October 30, 2002 03:15 PM

I hear the potential market for recycling PC's and thereby reducing their ecological footprint/effluent profile is one of the next big things.......................

Posted by: Ian on October 30, 2002 06:38 PM

I suspect the continuing increase in computer-related productivity has little to do with the continuing increase in computer power. I suspect that it is instead based on the learning curve continuing as it becomes clearer exactly how companies can apply computers to improve productivity. If computer performance were to be frozen at the January 2000 level, I would expect computer related productivity improvements to contine at *least* for several more years.

Or so I suspect.

Posted by: chris bond on October 30, 2002 08:07 PM
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