Business Week's Mar. 31 Cover Story, The New Economic Cycle, predicted that a slowdown in high tech could slow the whole economy. The author, Economics Editor Michael J. Mandel, was the Mar. 23 guest to discuss this thesis.
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Material entered into AOL by persons other than those identified as Business Week's employees or authorized representatives, acting on behalf of Business Week, is material for which Business Week assumes no responsibility.
OnlineHost: Welcome to Business Week Online! Has the long expansion of the U.S. economy repealed the boom-bust cycle? Not necessarily, according to BW's economics editor, Michael J. Mandel. Mike (MandelBW) explained why in the Mar. 31 Cover Story, and he's here to tell more. The moderator is Jack Dierdorff (JackBW) of BW Online. And now on to your questions -- is a slowdown coming?
JackBW: Good evening to all of you on AOL. Welcome, Mike Mandel, and thanks for being with us tonight.
MandelBW: Glad to be here.
JackBW: Mike, here's a question to start us off in broad-brush terms.
Question«MDNM»: The U.S. economy has been growing for six years steadily. Is this expansion about to end, in your view?
MandelBW: We're starting to see signs of a slowdown in the high-tech sector for the first time. And that probably signals the beginning of the end for this expansion, which has been driven by the tremendous growth of computers, software, and the rest of the high-tech sector.
JackBW: Mike, your story suggests that high tech's role in the economy is underplayed.
Question: Why don't policymakers in Washington take sufficient account of the impact of high tech on the economy? How big is it, anyway?
MandelBW: Alan Greenspan and the Federal Reserve are stuck in the past. They're still acting as if the U.S. is an economy driven by auto companies and homebuilders. But almost without anybody realizing it, the high-tech sector has become the sBUSINESS WEEK ONLINE
Transcript of Mar. 23, 1997, conference
WILL HIGH TECH SLOW THE ECONOMY?
Business Week's Mar. 31 Cover Story, The New Economic Cycle, predicted that a slowdown in high tech could slow the whole economy. The author, Economics Editor Michael J. Mandel, was the Mar. 23 guest to discuss this thesis.
Copyright 1997 America Online, Inc.
Material entered into AOL by persons other than those identified as Business Week's employees or authorized representatives, acting on behalf of Business Week, is material for which Business Week assumes no responsibility.
OnlineHost: Welcome to Business Week Online! Has the long expansion of the U.S. economy repealed the boom-bust cycle? Not necessarily, according to BW's economics editor, Michael J. Mandel. Mike (MandelBW) explained why in the Mar. 31 Cover Story, and he's here to tell more. The moderator is Jack Dierdorff (JackBW) of BW Online. And now on to your questions -- is a slowdown coming?
JackBW: Good evening to all of you on AOL. Welcome, Mike Mandel, and thanks for being with us tonight.
MandelBW: Glad to be here.
JackBW: Mike, here's a question to start us off in broad-brush terms.
Question«MDNM»: The U.S. economy has been growing for six years steadily. Is this expansion about to end, in your view?
MandelBW: We're starting to see signs of a slowdown in the high-tech sector for the first time. And that probably signals the beginning of the end for this expansion, which has been driven by the tremendous growth of computers, software, and the rest of the high-tech sector.
JackBW: Mike, your story suggests that high tech's role in the economy is underplayed.
Question: Why don't policymakers in Washington take sufficient account of the impact of high tech on the economy? How big is it, anyway?
MandelBW: Alan Greenspan and the Federal Reserve are stuck in the past. They're still acting as if the U.S. is an economy driven by auto companies and homebuilders. But almost without anybody realizing it, the high-tech sector has become the single most important factor driving the economy today. In 1995 and 1996 autos and housing actually went into somewhat of a slump, but high tech boomed, and so did the economy. For the first time, high tech could lead the economy into a recession.
JackBW: Here's a big-money question for lots of people.
Question: Do you think a decline in high tech could cause a plunge in the stock market?
MandelBW: I wouldn't be surprised if the fall in high-tech stocks leads the rest of the market down. According to BW's calculations, high tech has provided one-third of the growth in the economy over the last year. And a big chunk of all of the wage and salary increases has come in high-tech jobs as well. So if high tech slows, other companies will see their profits drop as well. Poof -- the stock-market boom evaporates! It could happen very quickly, by the way.
JackBW: While we're on the stock market, this comes from MWC22 in New Jersey.
Question: How much faith do you have that the tech stocks will remain volatile? Or will they steady out?
MandelBW: Steady out? Forget about it. They've actually been steadier than usual over the last couple of years. Analysts who think that the bottom has been hit are kidding themselves. The last couple of years of growth have been exceptional, and will not be repeated. I predict high volatility ahead for tech stocks.
JackBW: RACCINCY has a personal interest here.
Question: I work for a major manufacturer of plastics-injection machinery -- which is, of course, a heavy capital item. Any thoughts on the next 12 months?
MandelBW: Yes. I think that the odds are in favor of a slowdown, especially in capital spending. Companies have spent an enormous amount on new equipment over the last couple of years, and will be looking for any excuse to rein in their spending. Of course, Greenspan could keep the expansion going by cutting rates, but he won't do that -- still stuck in the past.
JackBW: JEFE I AM in Virginia asks for more about technology stocks.
Question: Why do you think tech stocks are on the decline?
MandelBW: The tech stocks have had a tremendous runup over the last couple of years, driven by the explosion of high-tech spending. What's happening is that a lot of tech companies are reporting slowdowns in sales -- 3Com, Cisco, other networking companies, some software companies. People are beginning to realize that the spectacular growth of the last couple of years won't go on forever. We're in a technology pause, and it's going to hit tech stocks hard.
JackBW: RACCINCY has another question.
Question: What impact will the rising U.S. dollar have on the high-tech market globally?
MandelBW: Good question. A little impact, but what's more important is growth overseas. Europe is still sluggish, Japan and South Korea are slowing, and Kodak just reported weakness in its emerging-market sales. Weak growth overseas will hurt high-tech sales more than the rising dollar.
JackBW: Bass9716 also has a personal interest in an industry's outlook.
Question: I work for a major jet-engine manufacturer. How does the market appear to be in the near future?
MandelBW: Aircraft run on a different product cycle than the rest of high tech. As long as the economy doesn't slip into a deep slump, aircraft should be O.K.
JackBW: Try this one next, from BobAB in Teaneck, N.J.
Question: How can you be sure that the growth of high-tech industries will slow? After all, just three years ago the Internet -- as a mass medium -- didn't exist.
MandelBW: Exactly the point. The last two or three years have been atypical --a "supernova burst," in the words of one economist. Now companies are having to digest their spending of recent years. The government's numbers show a slowdown in high-tech spending -- companies are reporting a slowdown in high-tech spending. How long will it last? I don't know, but it's already here.
JackBW: Janewine in Atlanta has a question for you, Mike Mandel of BW -- and for Alan Greenspan.
Question: Why are housing interest rates suddenly spurting forward?
MandelBW: Good question. I've seen that, too. It may be that banks are anticipating an increase in Fed rates. Or there may just be a lot of people buying houses, especially in the high-tech sector.
JackBW: Some history here, please.
Question: Did previous big changes in the economy (for example, the growth of the steel and auto industries) cause a change in the pattern of the business cycle?
JackBW: Maybe back to the Industrial Revolution?
MandelBW: Absolutely. The booms and busts of the late 1800s were driven in part by the railroad industry, which was really growing back then. Then when autos got big, they became the main force in the business cycle. Then the postwar housing boom made housing construction a key factor. This is a normal progression -- but the policymakers don't realize it.
JackBW: Take this question now.
Question: Are we nearing the point yet where microchip manufacturers and hardware companies have wrung all the profitability and technology potential out of existing products? Can they continue the momentum in product development and profitability much longer?
MandelBW: In theory, the product development can continue. In practice, I think this product cycle is almost over. Companies have spent an enormous amount on computers, software, and so forth, and they don't see any compelling reason to upgrade every time Intel or Microsoft comes out with a new product. Is this product pause permanent? Of course not. But it's real. I think tech companies will be in for a rough year, and so will the economy.
JackBW: Another question of the devil's advocate type on your thesis, Mike Mandel.
Question: Re your prediction on the decline of tech stocks, what's there to substantiate this idea other than what goes up must come down? Do you expect a slowdown in high-tech innovation, or a slowing in the rate at which prices for computers and related stuff fall?
MandelBW: This is not a case of what goes up, must come down. Rather, the high-tech sector has gotten way out in front of the rest of the economy in terms of growth. High tech is growing at 10% a year in actual dollars -- the rest of the economy is growing at 5% or less. This imbalance cannot continue for long.
JackBW: With this question, step back and argue against yourself, Mike.
Question: What's the most plausible counterargument to your theory about the new business cycle?
MandelBW: Most plausible counterargument? A brand-new product or technology which everyone has to have. The product cycle -- and the expansion -- should have ended in 1995 or so. But no one expected the Internet explosion. Another Internet would do the trick and keep the expansion going even further. But that may have been a once-in-a-lifetime event.
JackBW: M19College in Phoenix has an interesting insider's view of consumer credit. Comment?
Question: I work for a credit-card corporation, in the collections department, How long before America goes bust? The country seems to be living only on credit.
MandelBW: Good question. My thought is that incomes have kept up with spending because of the explosion of high tech. A lot of network technicians, high-tech marketers, programmers, and the like have had a lot of money to burn, which has spilled over to the rest of the economy. As the economy slows, a lot of the consumer credit will turn bad. But the banks and credit-card companies have already budgeted for a lot of credit turning bad. The question is: Have they budgeted enough? Time will tell.
JackBW: Gaffman8 in Avon, Conn., has a concern about the Far East.
Question: Will Hong Kong coming under Communist influence affect the U.S. economy positively, negatively, or not at all?
MandelBW: At this point, not very much different. We have enormous trade with China now. Hong Kong's absorption by China shouldn't make much difference to the U.S. (though probably a lot to people living in Hong Kong).
JackBW: Another international question next.
Question: What about foreign markets as a possibility for keeping the high-tech bubble afloat? China, for instance? Eastern Europe? Even Western Europe?
MandelBW: Could happen. But at least for the immediate future, Europe is growing slower than we are. So is Japan. And much of the growth in the rest of Asia is built on providing high-tech components to U.S. companies. So in the short run, global demand won't save us.
JackBW: MANSON4190 may be overstating your thoughts here, Mike Mandel of Business Week.
Question: The chances of the largest economy in the world going bust are very slim. Why do you think that we are going to go broke?
MandelBW: Nah, we're not going to go broke. I'm just pointing out that those people who say that this expansion is never going to end are misreading the economy and the forces driving it. The ups and downs of business cycles are still with us, but they are just driven by high tech rather than autos and housing. I like the future prospects of the U.S. I just don't think that means wine and roses every year.
JackBW: Now, a logical follow-up question to this answer.
Question: Do other economists agree with your thesis? Mike, are you out on a limb?
MandelBW: Some economists agree, especially when I tell them how big high tech has gotten in recent years. Many other economists do not, but I think they haven't looked at the numbers recently in the same way that I have. I'm very much interested to see what some of the wider reaction is to my thesis.
JackBW: BW will be watching the mail and the phones (and E-mail) for reaction to Mike's story. Now, back to the stock market, thanks to this from BAXMAC.
Question: Do you agree that the main driving force in the market today is simply the large amount of money that must be invested?
MandelBW: Remember that the money could go into the bond market, or into municipal bonds, or any one of a number of other places. At the margin, that could make a big difference to the stock market.
JackBW: And while we're on things relating to the market, take this one from GEORAH in Somersworth, N.H.
Question: Do you think the latest mutual fund craze will hurt the economy?
MandelBW: No, I think mutual funds are a big benefit to the economy. They let everyone get into the stock market. I do think that a lot of people will be surprised the next time the stock market falls -- people who have just started investing in the last few years are used to a market that rises forever. Nothing rises forever.
JackBW: This sounds like a question from an armchair economist.
Question: Haven't most recent recessions been preceded by high inflation? How atypical would your scenario be?
MandelBW: Most recent recessions have been preceded by rising inflation. But this expansion -- and the recession that will follow it -- are different. High tech has driven the expansion, and because computer prices have been falling, that has helped keep inflation down. But now the Fed is talking about raising rates even without inflation because they are still stuck in the past. They can start a recession if they raise rates at the same time high tech is already slowing -- making a double whammy for the economy. The next recession will not be preceded by inflation.
JackBW: Gaffman8 returns with a truly bottom-line question -- the very bottom.
Question: How likely is it for another Great Depression to occur?
MandelBW: Not very likely, as long as the Fed doesn't make a huge mistake. The big problem with the Depression was that the central bank completely misread the situation. They started taking money out of the economy when they should have been pumping money in. Central banks now have a much better understanding of their role as the lender of last resort. When things start heading into the pits, they start pumping money in. I assume the Federal Reserve would do that again.
JackBW: This question comes to MandelBW from Dmandel.
Question: When you are talking about high tech, are you also talking about biotech companies and their impact on the economy? If not now, in the future?
MandelBW: Biotech companies are still relatively small, and don't have the same impact as the info-tech companies. So I was mainly talking about information technology. In the future, who knows? BW just did a Cover Story on biotech [The Biotech Century, Mar. 10]. Maybe business cycles in the 21st century will be driven by biotech -- as for now, not important.
JackBW: JEFE I AM is back now.
Question: You have said that companies will slow down their tech spending. I agree. But wouldn't you say that the Internet explosion could keep tech stocks going based only on the consumer market?
MandelBW: Could happen. But consumers are even more tapped out. Spending on home computers and software has grown far faster than consumer incomes. So unless there is a compelling new product -- such as high-definition television -- we won't see consumers able to support the high-tech sector in the style to which it has become accustomed.
JackBW: Aabz asks the next one.
Question: Where will the purchasing power of corporations, formerly used to advance high tech, go? What other area of investment would they go for?
MandelBW: Actually, it turns out that they've actually spent a lot on industrial equipment as well. What would happen is that they would cut back on capital-spending growth to keep their profits up. They probably need time to digest before engaging in another investment boom. This is very normal, by the way -- these cycles in capital spending. We've just never lived through one before where high tech was the main capital-spending good.
JackBW: Any hope from the direction suggested in this question.
Question: Is there a chance, in your view, that if spending on high-tech goods slows, corporations will spend more on other things -- and thus keep the economy humming?
MandelBW: Good question. They could boost pay, which would give consumers the money they need to keep the economy growing. Will this happen? Based on the corporate behavior of recent years, they will do everything they can to keep labor costs down, especially if they feel the economy is slowing. So I wouldn't be too optimistic about rising pay bailing us out.
JackBW: SAM15194 in New York sends us this one.
Question: Do you feel that our lack of national expenditures with regard to purchasing new capital might eventually kill our consumption possibilities?
MandelBW: That's a real possibility. But the truth is that the U.S. is pouring hundreds of billions of dollars into high-tech equipment and software. Part of what we need to do is learn how to use it better, rather than just buying more and more. The history of technological innovations such as the railroads and electric power is that it takes a long time before companies figure out how to use these things best. The same is true for computers and communications. Productivity growth will continue, even if there is a high-tech slowdown.
JackBW: That's it for tonight's 45-minute AOL hour. Thanks to Mike Mandel, economics editor of Business Week, for discussing his cover story on The New Economic Cycle.
MandelBW: Thanks very much.
JackBW: We appreciate all the questions from the audience. Transcripts of this and all BW Online conferences and chats are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1997 by The McGraw-Hill Companies, Inc. All rights reserved.
