The American Economy
Following the Information-Technology Bubble and Terrorist Attacks

Managing Director of Sonecon, LLC
(Former Under Secretary of Commerce for Economic Attairs)
Robert J. Shapiro

January 2002

要旨

These are times of grave uncertainty and great challenges. The tranquility of our everyday lives has been shattered by the terrible attacks on New York City and Washington, and the world must struggle with a new enemy with global reach, one which we have never had to confront before. Most people's lives will not be directly affected by the violence inherent in this trial. But everyone will feel the ripples, not only in new security precautions that may challenge our traditional conceptions of liberty, but also in the economic aftereffects.

In truth, the terrorist assaults have not changed the basic economic questions facing us today. Before the assaults, the most important subject to understand was the performance of the American economy in the 1990s: Does it represent something different and new in economic life? To answer that question, we need to explore three other issues. First, after the IT boom and bust, and now the terrorist assaults, what is the state of the American economy and what are its prospects? Second, what does it mean for the Japanese economy and the rest of the world? Third and most important, what can we learn from America's recent economic successes and setbacks?

The State of the United States Economy

For the past year, America's economic story has been a tale of two economies, one strong and one weak. Before September 11th, our service industries were healthy, but manufacturing was weak. Business investment was depressed, while housing was strong. Consumer spending remained steady, as the stock market fell. Short-term interest rates had fallen by half, while long-term rates had risen. And more than any others, it is the information technology industries which have led the economy on both the ride up and the slide down.

>The ride up and the ride down were driven in part by a bubble in IT stocks and business investments. Especially in Tokyo, it is important to recognize how different this bubble was from what Japan experienced in the 1980s. Japan's bubble began in real estate, where values were driven up by distorting tax provisions, and which in turn funded a speculative stock bubble in corporations whose viability depended in many instances on protected markets and non-economic relationships with banks. Inside Japan's bubble there was little real economic value.

The American bubble represented an excess of something that in itself has real value for the economy -- information technologies. The bubble began in overinvestment in IT and spread to much of the stock market; but at its core, much of the IT was economically sound and efficient. Further, these dynamics also played a role in the capital spending boom of the 1990s, and much of that capital spending translated into permanently higher productivity. The result is that the American bubble should not do lasting damage to the American economy

Three factors contributed to the capital-spending boom and helped inflate the IT bubble. The first was continuing deregulation of telecommunications, which led to the creation of hundreds of new telecom carriers who raised billions of dollars on Wall Street to build new fiber optic networks and other systems. The second factor was the explosion of the Internet, which produced thousands of B2B and B2C firms that became customers for new IT and telecom equipment. Third, Y2K fears further boosted IT and telecom purchases. These factors are distinct and separate from the more classical bubble that occurred in Internet stocks, which had little real economic foundation and did resemble Japan's bubble, but which also did not greatly affect the rest of the economy.

The Internet stock bubble was based on distorted market signals - bad information - and it was punctured by better information, when it became apparent that a number of leading web firms were misrepresenting their revenues and profits, and, more important, that the typical Internet business model would not generate the cash to pay its bills. By contrast, the larger IT bubble wound down, first, when IT buying by manufacturing companies slowed following the energy price spike and rising interest rates of 1999, and subsequently when all that demand from new telecom and Internet companies dried up. The absence of Y2K disruptions also denied IT a possible boost in demand in 2000.

The speculation in American markets last year and the two or three years preceding essentially took the form of too much capital going to telecom and web firms in markets that ultimately did not generate the expected and necessary returns. The slowdown did not begin with IT, and much of the IT sector - especially services -- was only modestly affected by the speculative fever. But as demand for IT products fell, it became apparent that many leading IT producers had been over-investing in their productive capacities. The sector with the best information and the best ways of managing it was caught in a traditional cycle of over production and large inventories. The consequences were large, because many of the products that were over-produced have short shelf lives.

It affected the whole economy because business investment, a principal driver of the '90s boom, has been dominated by investments in IT. As business investment slowed sharply, the slowdown in manufacturing spread. GDP growth slid from the 4-to-5 percent pace of the latter 1990s, to 3 percent and then 2 percent. This was unavoidable, given the disproportionate role that the IT sector has played in recent U.S. growth. Comprising just 8 percent of GDP, the sector had been growing so fast that it accounted for nearly one-third of U.S. growth from 1995 to 2000.

IT production has been falling for more than a year, and as recently as this past summer, the fall in IT production accounted for almost one-third of the decline in total output. Overall, production in the U.S. declined this summer at 4.9% annual rate, virtually across the board. However, services have continued to grow at a reasonable rate, and since services account for most the economy, the U.S. avoided recession - at least until September 11th.

In fact, much of the news this past summer was encouraging. Successive interest rate cuts and the normal process of inventory liquidation and industry consolidation suggested that the end of the slowdown might be close at hand. The index of leading indicators, after falling for 14 months, turned around in April and headed upwards for the next four months. While shipments of capital goods have continued to fall, shipments of non-capital goods stabilized in June. New orders outside of IT actually started rising in August; and production in consumer and intermediate goods, as well as autos, began to gain, even as new orders for capital equipment have continued to sink. Most important, consumers and homebuyers remained generally upbeat. Retail sales, adjusted for inflation, grew at a 5 percent rate in the first half of this year and a 4 percent rate in the third quarter, and housing has been even stronger than it was in 2000. To be sure, overall consumption had slowed from its normal pace of more than 4 percent gains to 2-to-2.5 percent, and consumer spending on services was even slower. But the sharp interest rate cuts were boosting mortgage refinancing, which can drive up consumer spending.

However, there was also troubling news on the wage front. Hourly compensation has been rising at a 7 percent rate over the last year, much faster than productivity, so unit labor costs have begun to rise about 5 percent a year. A weak economy makes it harder to raise prices when labor costs go up, and with the capacity utilization rate in manufacturing down to less than 75 percent, prices at early stages of production were falling. So instead of pushing up prices, higher labor costs put the squeeze on profits. In fact, relative to output, profits fell this past summer to historically low levels. That's why before Osama Bin Laden did his dirty work, the Dow as well as the NASDAQ were well off their historic highs.

There were legitimate concerns that many companies, worried about rising unit labor costs and slowing consumer spending, would lay off more workers, further undercutting consumer confidence. The jobless rate did jump to 4.9 percent in August, and total hours worked fell at a 3 percent rate through the third quarter. But service employment was still growing. There have also been concerns about how fast U.S. exports could recover, with weakening across much of Euroland and the possibility of a nasty shock from the Japanese financial system. Still, service employment was still growing, the inventory liquidation was nearly complete, and it appeared that the economy might just be ready to turn around.