Transcript The Imminent U. S. Boom and its Implications for the

The Imminent U. S. Boom and
its Implications for the Global
Economy
Robert J. Gordon
Stanley G. Harris Professor in the Social
Sciences, Northwestern University, and NBER
Korean Standards Association Conference,
Cheju, Korea, July 23, 2003
To Look Forward, We Need Two
Components
• First, to understand late 1990s boom and
subsequent 2000-2003 U. S. slowdown,
recession, and subsequent slow recovery
• Second, to decompose the conflicting
elements in today’s U. S. economy and
predict out over the next two years.
Understanding the Reasons for
1996-2000 Boom: the “Virtuous
Triangle”
• Three elements to 1990s boom, like
three sides to a triangle
– #1 Innovation and Hi-tech Investment
– #2 Stock Market Wealth and Consumption
– #3 Productivity Revival and Inflation
The Macro Triangle:
The “New Economy” ICT Boom
Didn’t Happen in Isolation
• The “triangle approach”
– Why the ICT investment
boom and bust?
– Stock market: causes
and effects
– Economy-wide factors:
productivity growth,
inflation, monetary
policy
Component #1: Innovation and
Hi-tech Investment
• Virtuous Circle, Positive Feedback Loops
– Acceleration of Hi-Tech Innovation
• Internet, WWW, Mobile telephones, telecom
infrastructure
– Investment boom fed GDP Growth
– Investment boom and GDP growth together
generated stock market boom and bubble
Component #2: Stock Market
Boom and Consumption
• Fast GDP Growth stimulated growth in
income and consumption
• Fast GDP Growth and hi-tech “bubble”
caused stock market to triple 1995-2000
• Stock market boom created “wealth
effect” that allowed consumption to grow
faster than income
Stock Market reduced Saving and
Boosted Consumption
Household Savings Rate and the Ratio of the S&P 500 to Nominal GDP
12
180
160
Household savings rate
10
Household Savings Rate
8
120
100
6
S&P 500 / Nominal GDP
80
4
60
40
2
20
0
1970
1975
1980
1985
1990
1995
2000
0
2005
S&P 500 to Nominal GDP Ratio (1972=100)
140
Component #3: Productivity
Revival and Inflation
• Productivity Growth Doubled, 1973-95 to
1995-2000
• Fast Productivity Growth Held Down
Inflation
– Real wage growth fell behind
– Growth in unit labor costs was minimal
More on #3: Causes of Low
Inflation despite Fast Output
Growth and Low Unemployment
• Positive “Demand Shock” should have pushed
inflation up
• But offset by beneficial “Supply Shocks”
– Productivity revival
– Strong dollar, falling real import prices
– Low oil prices before 1999
– Medical care “Managed Revolution”
Effects of Low Inflation
• Normally low unemployment would
create faster inflation, cause Fed to
tighten monetary policy
• With low inflation, no need to tighten
• No change in interest rates, 6.0 percent
in late 1994, 6.5 percent in mid-2000
The Benign Fed: Contrast with
the Late 80s and Early 90s
Federal Funds Rate and the Output Ratio, 1984-2002
12
106
104
10
102
Percent
100
6
98
4
96
Federal Funds Rate
2
0
1984
94
1986
1988
1990
1992
1994
1996
1998
2000
2002
92
2004
Output Ratio
Output Ratio
8
What Caused the Productivity
Growth Revival: A Puzzle
• Much Research on post-1995 Productivity
Growth Revival
• Consensus: Major Cause was Boom in ICT
Investment
– Production of ICT Investment
– Use of ICT Investment
• For 1995-2001, ICT Investment Explains Entire
Revival, continued revival in 2002 unexplained
But Here’s the Paradox
• ICT Investment Boom Has Died, at least in 2000-2003, should
be “Bad News” for Productivity Growth
• But Productivity Growth Continues, as rapid 2000-early 2003
as 1995-2000
• Bad News vs. Good News, how can we make sense of this?
– ICT Investment is the bad news
– Continuing strong productivity the good news
• Has the role of ICT Investment Been Exaggerated?
Table 4
Contributions to Growth in Labor Productivity by Source
1973-95 vs. 1995-2001 and post-1995 Growth Acceleration
Labor Productivity
1973-
1995-
Post-1995
1995
2001
Change
1.40
2.25
0.85
0.71
1.17
0.46
Information Technology Capital
0.42
0.97
0.55
Other Capital
0.30
0.20
-0.10
Labor Quality
0.27
0.25
-0.02
Multifactor Productivity
0.42
0.83
0.41
Information Technology Capital
0.30
0.73
0.43
Other Sectors
0.12
0.10
-0.02
0.72
1.70
0.98
Contributions from:
Capital Deepening
Memo: Total IT Contribution
Productivity Growth in the NFPB
Economy: Actual and Trend
NFPB
C6 Actual productivity growth and HP 6400 growth
6
5
4
Actual
Percent Change
3
2
1
0
-1
HP 6400
-2
-3
1960
1965
1970
1975
1980
1985
1990
1995
2000
The Winter 2001-02 Productivity
Bubble
• Bubble Growth, next 8 qtrs AAGR
– 2001:Q3-2002:Q3 5.70 ???? (1.7 first 3)
– 1991:Q1-1992:Q1
4.01 1.15
– 1982:Q3-1983:Q3
5.19 1.58
– 1975:Q1-1976:Q1
4.63 0.99
• Are Forecasters Treating the Bubble as
Normal or Incorporating a Historical
Interpretation into their Analysis?
Reasons for Skepticism about the
Standard Decomposition
• Delay (analogy with electricity in the
1920s)
• Retailing in the 1990s: all the big boxes
• Europe: retail is where the gap is
• U. S. States: no role for ICT use
Table 5
Labor Productivity by Industry Group, U. S. vs. Europe,
1990-95 vs. 1995-2000, Annual Growth Rates in Percent
United States
European Union
1990-
1995-
1990-
1995-
1995
2000
1995
2000
Total Economy
1.1
2.2
2.4
1.5
ICT Producing Industries
6.1
6.5
6.0
8.5
ICT Using Industries
1.4
4.2
1.9
1.3
Non-ICT Industries
0.4
0.4
2.4
1.0
Why Won’t ICT Investment Come
Back?
• This is the Bad News
– For Productivity Growth (but ICT role
exaggerated)
– For the Economic Recovery
• Two Reasons
– Macro (total economy)
– Micro (special aspects of ICT Boom)
Historical Analogies to the end of
the late 90s IT Investment Boom
• Sir Edward Grey, August 3, 1914
• “The lamps are going out all over Europe;
we shall not see them lit again in our
lifetime.”
• Will the Late 90s ICT Investment boom
Occur Again in our Lifetime?
Falling Prices Doesn’t Mean that
Real Investment will Rise
Ratio of Computer Investment to Nominal GDP
1960-2002
1.2
1
Percent
0.8
0.6
0.4
0.2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
The Micro Side:
Does Supply Create its Own
Demand?
• Moore’s Law Cycle Time is About Supply,
but Economics is About Supply and
Demand
• Demand Fundamentals of the late
1990’s: One-time-only sources of ICT
Demand
The Micro Reasons why the ICT
Investment Boom Won’t Come
Back
• Least Controversial: Telecom Equipment
• The WWW Could Only be Invented Once
• Legacy of the Failed Dot-Coms
• Most Controversial: Software Falling
Behind Hardware
What Dragged Down the
Economy?
• End of Hi-Tech Investment Boom
• Stock Market Crash
• “Multiplier” Effects
After the Boom, a Sharp
Slowdown in Real GDP Growth
6
5
4
3
2
1
0
Apr-93
-1
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
This Chart Corresponds to
NBER’s Recession
Announcement Last Thursday
• Previously announced that the peak
occurred in March 2001
• New announcement (July 17) that the
trough occurred in November 2001
• It took our committee 20 months to
declare the end of the recession!
The Collapse of ICT Investment
was the Driver of the Recession
Real Computer Investment and Real Computer Deflator Growth, 1987- 2002
60
50
40
Percent Change
30
20
Real computer investment
10
0
-10
Real computer deflator
-20
-30
-40
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Macro + Micro Implications
• We won’t have another five consecutive
years with ~40% annual growth in
computer investment
• Even if ICT investment goes back to
1995 rates, productivity growth will not
• That leaves the last topic: diagnosing the
recovery
Can we be Confident that the
Recovery will be Sustained?
• Last November (2002), the consensus was too
optimistic
– 3+ percent growth forever starting next quarter
• Fixed Investment Starts Growing at Double
Digits
– CBO late 2003 Equip Investment +17
• Classroom:
– GDP = Multiplier times a+I+G+NX
Why was the Optimistic
Consensus of November 2002
Wrong?
• Consumption
– Auto Sale Payback
– Overextended Consumer debt
• Government Spending
– Today’s NYT Op-Ed: “Watching the S&L
Finances Implode is like watching a multiplecar auto wreck happen in slow motion”
And the Rest?
• Net Exports?
– Residual effect of strong dollar
– No matter how slowly U. S. economy grows,
forecast for foreign growth is slower
• That leaves Investment
– Fixed investment 1992<1989
Investment Pessimism?
• We’ve Already Seen: One-time-only
aspects of late 1990s
• Capacity Utilization Rate: Historically
Low
• Tight Credit Despite Alan Greenspan
If Everything is So Dire, How
Come the Recovery Continued?
The Bond Market Gyroscope!
• Signs of Weakness? Bond Market yields
tank
• A Housing Refinance Boom follows,
money flows to consumer pockets, the
economy is not weak after all
• So far, so good
I’m a “former skeptic” converted to
the case for rapid growth
• First, a rebound effect from slow growth
in the first half of 2003
• Let’s look back at that chart of monthly
GDP, change from 12 months ago
• The first reason for optimism is that the
temporary slowdown in spring 2003 will
be reversed
After the Boom, a Sharp
Slowdown in Real GDP Growth
6
5
4
3
2
1
0
Apr-93
-1
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Second Reason: Monetary Policy
• Short-term interest rates: down from 6.5% in
late 2000 to 1.0% now
• Long-term (10-year) interest rate: down from
6.7 percent in January 2000 to 3.9 percent now
• As low as 3.1 percent in May-June 2003
• Fed will hold short-term rate low “as long as it
takes” and buy long-term bonds if necessary
Fiscal Policy
• Federal Government Deficit:
– Surplus of $220 billion in 2000
– Projected Deficit of $450 billion in 2003
– Turnaround = $ -670 billion!
• Unprecedented shift from fiscal restraint
to stimulus
Components of Budget
Turnaround
• Loss of Revenue
– Weaker Economy
– Big loss of Capital Gains Revenue
• Bush Tax Cuts
• Higher Spending
Fourth Source of Stimulus: the
Falling Dollar
• Dollar Appreciated 1995-2002
• Dollar has Weakened 2002-2003
• Assymetric Effects, why?
– Fixed Exchange Rate with China and Hong
Kong
• Nevertheless a source of stimulus
Summary of Reasons for
Optimism
• #1: Bounceback from weak spring 2003
• #2: Unprecedented Monetary Stimulus
• #3: Unprecedented Fiscal Stimulus
• #4: Weakness of Dollar
Remaining Weakness
• State and Local Government cutbacks: offset
1/3 to ½ of Federal Stimulus
• Consumers have Bought Too Many Cars
• Housing Finance Boom Depends on Falling
Interest Rates
• Continued Impact of Excess ICT Investment in
Late 1990s
On Balance, the signs are there
for a vigorous expansion
• Need steady real GDP growth of 3.25
percent to keep unemployment constant
• Projected 3.75-4.25 growth from now for
two years will bring unemployment back
below 6 percent.
• Maybe not back to 5.3-5.5 percent until
late 2005, early 2006
Implications for Korea
• Big export markets: U. S. and China
• Continuing strong growth in China, now a
turnaround to strong growth in U. S.
• What about Japan?
• To quote Winston Churchill (who said this about
Russia in 1939)
• Japan is “a riddle inside a mystery wrapped up
in an enigma”