Is the Information Technology Revolution Over?
Comment of the Day

June 07 2013

Commentary by Eoin Treacy

Is the Information Technology Revolution Over?

Thanks to a subscriber for this interesting report by David M. Byrne, Stephen D. Oliner, and Daniel E. Sichel for the Federal Reserve. Here is the abstract
Given the slowdown in labor productivity growth in the mid-2000s, some have argued that the boost to labor productivity from IT may have run its course. This paper contributes three types of evidence to this debate. First, we show that since 2004, IT has continued to make a significant contribution to labor productivity growth in the United States, though it is no longer providing the boost it did during the productivity resurgence from 1995 to 2004. Second, we present evidence that semiconductor technology, a key ingredient of the IT revolution, has continued to advance at a rapid pace and that the BLS price index for microprocesssors may have substantially understated the rate of decline in prices in recent years. Finally, we develop projections of growth in trend labor productivity in the nonfarm business sector. The baseline projection of about 1¾ percent a year is better than recent history but is still below the long-run average of 2¼ percent. However, we see a reasonable prospect — particularly given the ongoing advance in semiconductors — that the pace of labor productivity growth could rise back up to or exceed the long-run average. While the evidence is far from conclusive, we judge that "No, the IT revolution is not over."

Eoin Treacy's view Veteran subscribers will be familiar with our view that technological innovation is very much on track and is likely to lead to outsized productivity gains in future. This report from the Fed echoes Mr. Bernanke's tone at a graduation ceremony he spoke at last month. (Also see Comment of the Day on May 21st). They are both notable for narrow focus on the benefit of technological development for the domestic US economy, By setting such limits they fail to address the major productivity gains that can be made from simply making current technology available to more of the world's population.

Even as the USA is likely to maintain its technological edge, the modernisation of productive capacity globally is creating wealthier trading partners and larger markets for US goods and services. Therefore a holistic approach to assessing potential is likely to prove invaluable as the pace of technological development and access accelerate.

The Nasdaq-100 is often considered a barometer for technology company performance. The Index posted a downside key day reversal on May 22 nd and continues to pause in the region of the psychological 3000. It bounced well today but some additional ranging is probably required before the medium-term uptrend can be reasserted. A sustained move below the 200-day MA, currently near 2780, would be required to begin to question consistency of the four-year advance.

If the Nasdaq represents technological development, we might consider the Dow Jones Industrials Average as a barometer for the sale of existing technology to as wide a global market as a possible. The Average found support this week in the region of 15000 but some additional ranging is likely required to support a reassertion of the medium-term uptrend.

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