March 2000 By Sherman Fridman nformation technology (IT) is currently a $500-$600 billion-a-year business in the United States, according to a recently released analysis from The Conference Board, a global non-profit research organization concerned with business issues. The analysis indicates that this dollar volume accounts for more than 40 percent of the total business investment in plant and equipment, and is driving more than 30 percent of U.S. economic growth. The Conference Board says that the continued strong appetite for investment in information technology will mean significant gains for the digital industries over the next few decades. As measured by The Conference Board, business investment in IT over the past three decades has increased at a rate of 10 percent per year, with real computer capacity increasing almost three times as fast because of the dramatic decline in the price of computing power. But, in the decade just past, IT investment grew even faster; for the past two years, information technology investment increased at an almost 25 percent annual rate. ...investment in information technology will mean significant gains for the digital industries over the next few decades. Gail Fosler, senior vice president and chief economist of The Conference Board, writing in the latest issue of StraightTalk, a newsletter prepared for Conference Board Associates, concluded, "One of the reasons most economists have underestimated the U.S. growth rate during the '90s is the failure to recognize the role and growing importance of information technology spending." Fosler, also contends that consumers heighten the economic impact of IT spending even more due to their increasing use of information technology. Consumer spending on computers is up threefold since 1992, and has almost doubled since 1995. The Conference Board cautions that as IT moves from containing costs and improving organizations to an outright source of new product, the issue of measurement becomes more difficult. As explained by Fosler, "Many of the values the 'e-world' delivers are not measured in the economy. Businesses will find advancing technologies make markets more dynamic, efficient places and greatly accelerate the creation of subjective output that is mostly excluded from the current CPI (consumer price index). And the measures of the economic impact of this sector are even further behind. There is a huge task ahead for the economic measurement system." Although recent government data finds that business spending on software rose from about $25 billion a year in 1987 to over $150 billion today, software continues to account for only slightly more than 28 percent of IT spending. As a result, The Conference Board concludes that the technology transformation in IT hardware is driving applications rather than the other way around. The group also found that the service sector still accounts for more than three-quarters of all IT capital, but that manufacturers are increasing their IT capacity by up to 25 percent per year - probably even faster recently. Given all the spending on IT, The Conference Group finds that there the value of IT capital stock on-hand (hardware, as opposed to software which is usually expensed) is about $155 billion, not much when compared to the more than $400 billion value of communications equipment on-hand. There are two reasons given by The Conference Board for this modest dollar value of IT capital stock. The first, and according to The Conference Board the most important reason, is that IT depreciates rapidly and therefore accumulates slowly. A case in point would be a piece of traditional capital equipment with a 10-year life span that depreciates about five percent per year, on average, compared to a personal computer which depreciates nearly 80 percent in just the first year. "No matter how much information technology there is already in an industry, there appears to be a demand for much more." The second reason given is the large amount of business experimentation with information technology - so much so that equipment that may not be obsolete in theory becomes obsolete in practice, and therefore is written off. The Conference Board concludes that because of the pace of innovation and the declining price of computing power, information technology is often treated as disposable technology. Fosler says that she could find no evidence of diminishing returns from IT spending. "No matter how much information technology there is already in an industry, there appears to be a demand for much more." All this, of course, bodes well for future IT growth. The United States currently has more than 400 personal computers per 1,000 people, according to The Conference Board. Canada and Japan are next with more than 200 per 1,000, with the European Union, as a whole, close behind. However, only a little more than five percent of the world's population has computers. Therefore The Conference Board concludes that not only is there tremendous potential for further IT investment in the U.S. where IT intensity is already high, there is even greater opportunities for growth as IT capacity is expanded in the rest of the world. More information about The Conference Board is available at http://www.conference-board.org Reported by Newsbytes News Network, http://www.newsbytes.com iBiz iBiz Table of Contents