Will the hi-tech bubble burst?
Are booming industries more vulnerable to a slow-down? The answer would seem to be yes
Thursday 29 July 1999
What is the evidence of trouble? Several small things. For a start, there has over the last 10 days been a sharp fall here in the share prices of high-technology companies, of between 10 and 20 per cent. Now that in itself may mean nothing. Shares go up; shares go down. This may just be the long-awaited "correction", to use the Wall Street jargon, which makes any fall in prices seem proper and wise, and it does follow six months of remarkable price gains. Still, US consumers are net borrowers - households are spending more than they are earning - and many of them depend on their soaring share portfolios to support their lifestyles.
Associated with weaker share prices has been a decline in the dollar. That also may say nothing about US health. Then again, it may simply reflect the faint signs of life that are appearing in the Japanese economy, or the more substantial ones in Germany's. The euro's return to fashion, too, plays a part. But a fall of the dollar was not on the radar a couple of weeks ago. Could it also signal a change in perception about the medium- term strength of the US economy?
But the thing that struck me most was a comment by Dr Alan Greenspan, chairman of the Federal Reserve Board. He has been much in the news this week for dropping hints (or maybe not - his words are intentionally opaque) that the Fed may have to raise interest rates soon. That sent a predictable chill through the markets, though it could be rationalised by the argument that, provided people feared that rates might go up, the Fed would not need to raise them.
The remark of Mr Greenspan's that seemed to me to be more important, though, was not about rates but rather about the sheer difficulties of reading the US economy at the moment. His message was that one part of the economy, the hi-tech sector, was experiencing rapid growth and rapidly falling prices. While hi-tech was still relatively small, it was skewing all the figures. Without these industries, growth would be much lower and inflation rather higher. This, he acknowledged, made policy decisions very difficult. He did not use the expression, but his gist was that the Fed was flying blind.
Even if the Fed had perfect data, it would face a dilemma. The hi-tech industries account for less than 10 per cent of the US economy, but they are delivering three-quarters of its growth. Should the Fed set interest rates to suit the booming hi-tech sector, or should it set them for the economy as a whole? Since prices were falling in hi-tech areas, did the Fed's time-honoured practice of looking at signs of price inflation still hold good, or should it be on the look-out for other ways of measuring overheating.
We have a similar difficulty in Britain, with the booming service industries of the South-east and the still-struggling manufacturing ones of much of the rest of the country. It is hard to set the appropriate interest rate for both of them. But in the US the scale of the dilemma is much greater.
In the late Eighties, the US economy grew at about 4 per cent per annum, while the high-technology industries grew at 7-8 per cent. In the last two years, US GDP has again been growing at a rate of about 4 per cent, but the hi-tech industries have been growing at 25-30 per cent a year. So an amazing, rip-roaring boom co-exists with what would otherwise be a rather plodding economy.
You can even see this on the ground. I spent yesterday in upstate New York with a successful communications company. It had gorgeous new headquarters, a line of executive jets, the works. But it was located in the middle of a deeply depressed area. The local town was fine, but there were abandoned factories down the road. The municipality was desperately trying to attract new industries to the region to replace fast-disappearing manufacturing jobs. So the company was an island of prosperity in a sea of concern. While it could assist the local community, it could not pull up the whole region.
Look nationally, and the pattern is repeated. There are a number of hi- tech poles of growth - Silicon Valley, of course, but also Dallas, Los Angeles, Boston, Seattle and Washington DC. But there are also large swaths of the US where the economy is pretty flat.
In economics, what goes up usually comes back down. Growth rates of 25 per cent compound cannot be sustained for ever, raising a disturbing question. Are these booming industries more vulnerable to a slow-down than the plodders of the rest of the United States? The answer, according to a report, "America's High-Tech Economy", just published by the Milken Institute, seems to be: yes.
Naturally, the benefits of booming industries far outweigh the dangers, but hi-tech industries have in the past been particularly volatile. Computers and office equipment, aircraft, electronic components, communications equipment - all these classic hi-tech industries experienced much bigger down-swings than the economy as a whole, when recession struck.
Those are, so to speak, "old" hi- tech industries in the sense that they have a sufficiently long record for us to know what happened to them in previous downturns. Will the newest ones, the Internet and mobile-telephone- related industries, also be vulnerable?
Of course, we cannot know, but the danger is probably not so much of a contraction, but a dramatic slowing down of the rate of growth. I should imagine that, whatever happens to the US economy, the Internet-related industries will go on growing. But just growing more slowly than expected would generate a seismic shock across the nation. If, after the eight- year boom, the country as a whole finds it difficult to remember hard times, the key movers in the Internet-related businesses find it even more difficult; many of them were still at college, or even high school, during the last recession.
To say this is not to call "time" on the US hi-tech boom. The extent to which the US has outpaced the rest of the world remains as true as ever. A dozen new hi-tech ventures are announced every day. Funds flood into these companies, and some, just a few, will become the Microsofts of tomorrow. The distant thunder may simply presage a shower and not a storm. Even the dilemma of the Fed's chairman is not entirely new. Sure, the figures are particularly confused, but central banks and finance ministries have always to steer, to some extent, by looking in the rear-view mirror.
And yet it is troubling that the great engines of growth in the US seem to be inherently more volatile than the economy as a whole. It is troubling that the folk-memory of the need for caution has evaporated. And it is troubling that the Fed's chairman is troubled.
Some day, there will be America's first hi-tech recession. We just don't know when it will come. But do not expect the prosperous citizens to worry about that just now. I read yesterday that in 1997 (the latest figures available) there were 142,556 people who declared to the revenue an income of more than $1m. Nowadays, to be considered even moderately rich in the US, it is not enough to be worth a million or so. You have to earn it every year.
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