Fed Vice Chairman Does Some Monday-Morning Quarterbacking

Roger Ferguson correlates the boom of the late '90s and the bust this decade with unusual business spending, spurred largely by technology investments.
IT gaveth and IT tooketh away. Federal Reserve vice chairman Roger Ferguson, speaking at a conference Tuesday, said that IT spending has played a significant role in the excruciatingly stubborn recession.

In a speech during Carnegie Mellon University's Global Economic and Investment Outlook Conference, Ferguson correlated the economic boom of the late '90s and the bust at the beginning this decade with an unusual pattern in business spending, spurred largely by technology investments.

Historically, investment spending nearly always begins to decline one to four quarters after an economic peak, he said. Yet in today's recession, the decline in spending preceded, and, in his opinion, sparked the downturn. "This downturn in investment seems to have been caused by an overbuilding of capital stocks in the late 1990s, especially in high-tech equipment," he said.

Companies spent like mad hoping to capitalize quickly on three developments: chip advances, the Internet and network-equipment innovation, and software that advanced the capabilities of PCs. "The expected returns from the new equipment did not materialize, and many of the new high-tech startups went bankrupt," Ferguson said. The economy was left with a "bulge in corporate defaults for investors to absorb and an overhang of high-tech capital" all of which has "exerted a substantial drag on business spending and economic activity."

Business spending is not recovering as quickly as in previous recessions and is hindering an overall economic recovery. Yet Ferguson says that investment in equipment and software appears to have bottomed out and may be increasing. Combined with other economic indicators and the Fed's recent decision to cut interest rates, he says that the pieces are in place for a gradual strengthening of economic activity.

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