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9/25/2003
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Fall Conference: Threats To Recovery

InformationWeek columnist William Schaff told attendees at the Fall Conference that continued job losses and increasing national debt endanger the economic recovery.

The U.S. economy is recovering and IT spending may soon revive, but the return to growth is fragile and fraught with pitfalls, said William Schaff, CEO and chief investment officer of Bay Isle Financial Corp., on the closing day of the Information Week Fall Conference in Tucson, Ariz.

And while few companies have made big increases in IT spending over the last two years, IT budgets have basically held steady through the current recession. "Long-term trends for IT spending appear to be intact. That shows where our productivity gains continue to come from," Schaff, an InformationWeek columnist, told his audience of CIOs and IT managers on Wednesday.

Retail spending and the stock market are showing signs of recovery. But one of the hazards for the economy is that employment is still contracting. In addition, the heavy national debt will make its weight felt if the dollar continues to decline against the euro and Japanese yen, Schaff said.

Economists around the world regard a deficit that is 5% of gross domestic product to be inflationary, and with the latest expenditures for the mission in Iraq, the deficit will move from 4% of GDP to 5.3%, he warned. One likely outcome will be fewer investors for U.S. Treasury debt instruments. Current low interest rates may be swamped by an inflation that reduces the value of the investment, he pointed out.

"Foreign investors will be less interested in buying our debt," Schaff warned. A drop in buyers of U.S. debt "will force interest rates up," and an economic recovery could find itself stalled by more expensive borrowing, he noted. "The titans of industry have been reluctant to commit to too much capital spending for an expansion mode that may not last very long," he said.

Consumer spending is largely based on home-equity gains that cushioned losses in the stock market. But home-equity gains will cease or retreat if the economy doesn't stop exporting more jobs than it creates. The trend still lies in favor of U.S. companies creating jobs offshore in India, Taiwan, and Southeast Asia rather than at home.

When asked why Asian countries were capturing so many IT outsourcing projects, Schaff recounted traveling through Asia and seeing how well students were educated, particularly upper-class students in India. High-level programming and systems-management talent costs one-fourth what it does in the United States, and the trend of exporting IT jobs is unlikely to reverse itself soon, he noted.

In the past, the Federal Reserve Board has resisted the slide toward recession by lowering interest rates. Now rates are so low there is little the Treasury Department or Fed can do about the slide of the dollar. With interest rates at their current levels, he said, "the Fed can't do much more. If it tries, it'll be shooting blanks."

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