Productivity Engine Still Running
The most important question to ask this New Year’s weekend is not whether the economy will suffer a recession, but whether investments in technology and gains in productivity will pick up again after the current slowdown.
There’s no denying this is a worrisome period. Tight business conditions will greet the new year. Recession is possible as companies cut back spending on plants and equipment and lay off employees. But that kind of slowdown can be remedied by lower interest rates and the promise of tax cuts.
Gains in productivity--industrial output per dollar of investment or unit of labor--have taken off in the last five years as applications of computer programs have brought dramatic efficiencies to businesses and many other institutions, from hospitals to local governments.
If such productivity gains were to diminish, as growth of business capital investment slows to a rate of 6.5% from more than 10% in 2000, the economy would have problems not easily fixed by lower interest rates or taxes.
“If information technology were to lose its luster, the engine responsible for the acceleration in productivity growth would be gone, and there would be no easy way to get it back,” says economist Joshua Feinman of Deutsche Asset Management, a New York investment division of Germany’s largest bank.
On the other hand, if investment and adaptation of technology by business continues, then the slowdown will be a pause in the healthy, long-term growth of the economy.
Happily, it’s time to accentuate the positive.
What we are witnessing in the fall of the “dot-coms” and in stock price declines for technology companies is a transition from one phase of the “new economy’s” development to another.
Technological development and sales growth of personal computers have slowed. But expansion of the Internet as a carrier of services over broadband fiber-optic cables continues faster than ever. Development of wireless communication and devices likewise proceeds at a headlong pace.
Optical channels, which use light waves to deliver information more easily and cheaply than electronic circuits, will help fulfill the Internet’s promise of extensive interactive contact among businesses and people.
But despite massive overuse of the word “Internet” in the last five years, use of the Internet is still in its infancy. The network itself is still under construction. The annual total of Internet commerce, estimated at $100 billion to $200 billion, is too small in relation to the $10-trillion U.S. economy to have had much visible effect on productivity, say economists Robert Litan and Alice Rivlin of Washington’s Brookings Institution in a new study on whether the Internet will increase prosperity for average Americans.
Litan and Rivlin, and other economists in the Brookings project, conclude that the Internet’s effect will show up in mundane ways--reducing costs of processing health claims from $10 apiece to $2. More exotic uses will come with the spread of bandwidth, transforming automotive production and sales by offering car buyers custom-made vehicles delivered in a matter of days.
Such futuristic visions have become commonplace in recent years, even as Internet infrastructure was being built by companies trying to perfect amplifiers for light waves and switches that work on light pulses.
At the turn of the year, it’s a positive sign that companies involved in building the Internet are not slowing down but adding to investments in an attempt to keep up with intense demand for online capacity.
Corning Inc., the $7-billion-sales inventor of fiber-optic cable, will increase capital investment to $2.5 billion next year, from $1.8 billion in 2000.
Nortel Networks, the Ontario, Canada-based company that has transformed itself from a maker of telephone equipment into a supplier of Internet networks and services, is also increasing investment in 2001.
Lucent Technologies, struggling to move on to optical networks from its historic base in telephone equipment as the former Western Electric division of AT&T--is; maintaining capital budgets despite adversity.
Smaller suppliers of optical components, such as Sycamore Networks and Ciena Corp., also are spending to expand.
The stock market has been brutal to Internet infrastructure companies--hitting stocks of Corning and others for declines of 50% and more in recent months. Yet the stocks don’t look cheap, with prices at 40 to 50 times underlying earnings.
What lies ahead in that respect is a technological and financial free-for-all, experts say. Silicon Valley venture capitalist Vinod Khosla predicted to the high-tech publication Red Herring that 90% of today’s optical-component start-ups would fail but the remaining 10% would flourish.
That, of course, is normal for a dynamic economy and an environment of constant innovation. Bottom line is that we can anticipate rising productivity for years to come as Internet networks and services are built out.
Meanwhile, economies everywhere are pausing at the start of 2001. Europe’s economies are slowing, J.P. Morgan & Co. economists report. Japan’s huge economy remains in the doldrums. The rest of Asia as well as Mexico and Latin America will struggle early in the year as the big U.S. economy sputters and reduces purchases of foreign goods.
Domestically, the economy will be in the aftermath of a period of surging investment in small telecommunications and high-tech companies. Many of those companies will disappear. Some will be acquired by the major telecom firms, such as SBC Communications and Verizon, which are cash-rich and eager to expand their Internet capabilities.
All companies will focus on cutting costs and outsourcing operations to bring down overhead. That will make work for contract suppliers of production and industrial services, such as Toronto-based Celestica Inc., Solectron Corp. of Milpitas, Calif., and Jabil Circuit of St. Petersburg, Fla.
Outsourcing of jobs will mean more work for such companies as Manpower Inc. of Milwaukee, Robert Half International of Menlo Park, Calif., and Adecco Inc., which is based in Lausanne, Switzerland. The staffing industry grew to $130 billion in worldwide revenue in the last decade as contract personnel took on every kind of job.
The main expectation to have for 2001 is that new inventions will change perspectives on business and investment. Five years ago nobody predicted the development of the Internet, much less the productivity gains of 1995-2000.
The outcome of next year’s economy will be better than its outlook today.
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James Flanigan can be reached at jim.flanigan@latimes.com.
