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Economy Likely To Falter, Not Fall

Gail Fosler, executive vice president and chief economist of The Conference Board, tells Computer Reseller News that all signs are pointing to a 1995-style slowdown.
CRN: The Conference Board's Consumer Confidence Index has remained so strong in the face of, for example, $3 a gallon for gasoline. How do you explain this strength?

FOSLER: The strength is fundamentally rooted in the job market. The index is made up of two subindexes: one where we ask households about the present situation, and the other where we ask about their expectations. The present-situation subindex has been largely driven by the job market, weakening in May and June and then steadying in July.

Expectations, in contrast, have been on a deteriorating trend for the past couple of years. Typically, in cyclical peaks, people say things are pretty good, and they can't get better. And that is when the expectations numbers give you a forward signal that things may not remain as good as they are today. In addition, the [Conference Board's] index of Leading Economic Indicators has moved into negative territory -- on a six-month rate-of-change basis -- for the first time in this current business cycle. This is not the end of the world, but it is a sign that the cycle is aging. These are some of the signals that help us gauge where we are in the business cycle.

CRN: So it's more a matter of the aging of a business cycle rather than a sharp economic downturn.

FOSLER: Right. And one of the big signals we are looking at is second-quarter corporate profits. This is another one these so-called long lead indicators about trends in the economy. Corporate profits have been just phenomenal, and it's hard to talk about a recession in that context.

CRN: How much of this corporate cash will go into new investment in business technology vs., for example, stock buybacks or acquisitions? And if consumer spending slows, can business technology investment pick up the slack?

FOSLER: Companies have been spending a lot of money on stock buybacks and acquisitions, but investment rates are not all that high. As to technology investment picking up the slack, I think that the answer is no. The world has been on what I would call a diversified investment boom -- unlike the 1990s, where investment was almost all in the technology sector. A lot of manufacturing investment has been going on globally, along with a lot of infrastructure investment. So you have a much more diversified investment environment, especially with what has been happening in China and India, and technology doesn't begin to have a claim on the investment dollar today that it did 10 years ago.

CRN: So technology is now one sector out of many that is competing for the business investment dollar, and that makes technology a tougher sell.

FOSLER: That's right.

CRN: In your speech at the Conference Board's Sustainability Forum in January, you said knowledge is a "unique forum for the divide between advanced and emerging markets," and in China and India, for example, the idea that knowledge could be a "private" good is incomprehensible, given the cultural histories of these countries. That's very interesting in light of the growing concerns about intellectual property protection. Can this divide be overcome so that these countries take the idea of intellectual property protection more seriously?

FOSLER: Only with difficulty. We are co-organizing a major conference in China with the National Bureau of Statistics on innovation. We're going to do an innovation survey of Chinese companies, and we may learn a lot about their attitudes about intellectual property. But we have been coming at these things from very different value structures and, up to now, we have been able to ignore this. However, with all the multinational investment and globalization going on, we are eventually going to have to sit down and say, 'Maybe there is some value to these differences. Maybe we should do things a little your way.' We have to be respectful and get down below the how and into the what.

Complicating matters is the fact that some companies view intellectual property as "closed" and some view it as "open." On the one hand, you have strong intellectual property advocates like Microsoft. But on the other hand, you have other companies like Philips that think the transfer of technology is so ubiquitous in the ability to design that rather than spending a lot of time trying to protect innovation, we are just going to try to out-innovate, out-brand and out-market our competition. So things like the know-how, the marketing and all the rest become a part of the debate as to how important intellectual property is.

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