Tech Buying Fuels Strong GDP Growth

Third-quarter technology investments skyrocketed at 18% annual pace
Merchant Services Inc. is earmarking nearly 30% more money for IT than it did a year ago, as the credit-card processing company buys servers, PCs, routers, and software to foster expansion. Guaranty Federal Savings Bank has spent more on IT in the last six months than it did in the past two years as it acquires technology to implement interbank check-processing rules aimed at eliminating exchanges of paper checks. Armstrong Relocation Co. increased computer spending by more than 10% as it upgraded its AS/400 server this summer, along with a slew of PCs as part of an IT-modernization program to remain competitive in its sector.

The improving economy had little to do with their companies' decisions to increase IT spending, executives say. Still, economists credit hardware and software buying with helping fuel an explosion in the U.S. economy during the third quarter. Gross domestic product--the value of all goods and services produced--skyrocketed at a 7.2% annual growth rate in the period from July to September, the strongest pace in nearly 20 years, the Commerce Department reported last week.

About one-sixth of last quarter's GDP growth came from all types of business investments in equipment and software. Information-processing equipment and software represented more than half of equipment and software investments last quarter.

No doubt the Bush tax cut played a role, too, in the sky-high GDP figure. But as the impact of the tax cut fades, so will the growth rate. Most of that tax cut has been spent--in the past quarter, federal tax collections dropped $100 billion as consumer spending increased $108 billion, says John Rutledge, an economic adviser to President Bush. "The challenge is to get past this tax cut and have sustainable capital spending," Rutledge says.

With business profits on the upswing, companies have gone on a buying binge, and IT is high on their shopping lists. "For most companies, technology is the first thing they buy," says Brian Keyser, chief U.S. economist at Citigroup Asset Management. "They're playing catch-up, adopting technology they wish they could have purchased two years ago. IT yields the most bang for the buck for corporations. You can get almost an instant return on your investment."

IT buying rose 4.3% in the third quarter, down a bit from the 4.4% increase posted in the second quarter, but significantly higher than rates logged during the past 1-1/2 years. In the third quarter, business investment in computers and peripherals soared nearly 10%. Software purchases rose 2.3% during the third quarter. If this past quarter's pace continues, IT buying will increase at an 18.3% annual rate.

No one predicts such a rate will be maintained over the long run, but no one speaks of a recession returning anytime soon. "After a prolonged period of justified skepticism," says Anirvan Banerji, research director at Economic Cycle Research Institute, an economic-forecasting firm, "people in charge of spending are finally beginning to believe this is a sustained recovery."