New Economy endures, and whole economy benefits

Continued spending - from PCs to e-Valentines - bodes well for rising US productivity in years ahead.

On Valentine's Day, Hallmark.com saw a fourfold jump in traffic from the year before as Americans used the Internet to send words of love and gifts to relatives and friends.

It's a heart-throbbing sign of life in a high-tech economy that is apparently starting to turn up from a deep downturn.

While the strength of the technology rebound is unclear, it represents a long-awaited boost to an industry that has been an engine of growth in good times and a major laggard during the recent slump.

More broadly, the health of the New Economy - which embraces computers, software, and telecommunications as well as dotcoms - bodes well for the efficiency of the overall US economy.

High-tech helped speed the pace of productivity gains since 1995, and experts say the United States has an excellent prospect of continuing that progress in the decade ahead. In turn, this should lead to more prosperity, less inflation, and perhaps even growing government revenues.

"The US productivity revival remains largely intact," figures Dale Jorgenson, an economist at Harvard University in Cambridge, Mass.

Federal Reserve chairman Alan Greenspan shares the view that technology-related productivity gains have plenty of room to run. Citing upticks in orders for computers and semiconductors, he added that "Recent evidence suggests that a recovery in at least some forms of high-tech investment could already be under way."

The turnaround remains nascent. Technology stocks, for example, are still trading far below their peaks and have been struggling in recent weeks. The tech-oriented Nasdaq index did jump 4 percent Friday - hinting at some renewed optimism on Wall Street. But it will take more than that to get Silicon Valley cheering.

Last year was not a good one for the New Economy - and many stocks went bust back in the spring of 2000. Industry hype disappeared as dotcom closures multiplied. Some 762 "substantial" Internet firms among more than 7,000 shut down in the two-year period between Jan. 2000 and Dec. 2001, according to Webmergers.com. About 135,000 Internet workers were laid off.

STILL, 5.6 million Americans work in technology-producing industries, with higher-than-average wages.

And during this gloomy period, the Internet has continued to grow. As of September, 143 million Americans, 54 percent of the population, were using the Web, up 26 percent from a year earlier.

At Hallmark.com, the Valentine rush was such that some visitors faced delays or couldn't even get on the site at times. Total e-commerce sales for 2001 were about $32.6 billion, up 19.3 percent from 2000, according to a recent Commerce Department report.

Moreover, the moribund market for initial public offerings of stock showed a touch of vitality recently. The online payments provider, PayPal Inc., was able to sell $70.2 million of shares, even though the Palo Alto company faces a patent-infringement lawsuit.

Even looking backward at the slump in high-tech investment, the Commerce Department takes a bright view: Spending on computer equipment and software in the fourth quarter of 2001 stood at "remarkably high levels by historic standards," the agency's report says. The annual rate was $408 billion, down 16 percent from the peak four quarters earlier. But since equipment prices are falling rapidly, that means the number of units bought fell just 3 percent in 2001 from 2000.

With this trend in mind, Professor Jorgenson projects that the growth in labor productivity - what American business produces per hour of work of input - will grow about 2.24 percent a year on average in the next decade. That's only a bit below the 1995-2000 average of 2.36 percent.

President Bush's Council of Economic Advisers has a similar forecast: a 2.1 percent annual increase in productivity once the present recession is past.

"There is something there," says Robert Solow, referring to the New Economy. A Nobel-Prize-winning economist at the Massachusetts Institute of Technology in Cambridge, he also sees 2.1 percent gains.

Any of these numbers are an improvement on the 1980s and early 1990s. They would provide a faster rise in living standards for Americans generally.

Some analysts credit computerization. As people learn gradually to better use the machines to accomplish their work tasks, productivity goes up. New technologies often take years to bear an abundance of productivity fruit.

In the last quarter of 2001, nonfarm and manufacturing productivity grew at a 3.5 percent annual rate. That caused some excitement among economists, because such a bulge in productivity during a slump hasn't happened in 50 years.

As technology gets back on its feet, economists are raising growth forecasts for the US economy in 2002. James Glassman of JPMorgan Research recently raised his forecast from 2 to 3.25 percent.

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