It never happened. The IT investment boom of 1998 to 2000 has been scaled back significantly in the annual revisions of U.S. gross domestic product.
GDP growth in 2000 was cut from 5% to 4.1% and corporate profits for 1998 to 2000 were revised downward by about $140 billion while wages were revised upward by $60 billion. Less output and more labor means that productivity was not as high as first reported. Lower profits means a weaker outlook for investment.
The size of the IT sector was drastically cut. The software sector in the first quarter of 2000 was revised downward to $191 billion from $243 billion, computers were lowered to $103 billion from $109 billion and other high tech (read: telecom) was revised down to $167 billion from $182 billion. First quarter hardware spending was restated $21 billion lower--a 6.2% cut.
Software spending was slashed by 21.4% or $52 billion. The level of spending on housing, including electricity and gas, as well as housing construction, was revised up.
The computer revisions are within the normal range. Volatile pricing, complex distribution and the large number of small manufacturers make this hard to measure quickly. The telecom revisions are outside the average range. Discounting and marked down prices for inventory probably account for most of the decline.
The software revisions are way outside the average range, however. The Bureau of Economic Analysis that prepares the GDP estimates only began accounting separately for software with the last year. Initially they measured input--the number of jobs and average wages--but switched to measuring output based on industry surveys and company reports of software sales.
Some very stable industries have always been measured for the initial GDP estimates by input because this is much easier to do. Software no longer fits this category. It turns out that many programmers were working on software that was sold at a loss, never sold at all or abandoned.
What does this mean for the timing and strength of the anticipated recovery in the IT market and the economy? It is good news. There is a lot less excess capacity than we thought last week so any rise in demand will prompt investment more quickly than we first thought.
We have to rethink recent economic history, however. Immigration should get as much credit as innovation for the 1998 to 2000 economic boom.