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Tech Economy Strong, For Now

With production humming at computer hardware manufacturers and chipmakers Intel and Advanced Micro Devices Inc. posting vigorous quarterly gains, the IT hardware market looked strong last week. But economists caution that this robust performance won't continue, at least not at these levels. "Growth has been rapid, but should moderate," says Scott Brown, chief economist at brokerage Raymond James & Associates. "But we don't think it will be falling off a cliff."

Intel last week posted second-quarter revenue of $8 billion, 18% higher than a year earlier, as profits soared 96% to $1.8 billion for the quarter, ended June 26. Competitor AMD posted revenue for its second quarter, ended June 27, of nearly $1.3 billion, a gain of 96% from a year earlier, and recorded a profit of $32 million, a reverse from the year-ago loss of $140 million. The Federal Reserve said computer production in June rose 3% from May and 31% from a year earlier. Computer vendors' factories operated in June at nearly 80% capacity, the highest level in years.

Still, the numbers can deceive. Intel warned that a short-term high had been reached in its business. Its inventories rose, too, signifying that sales will be harder to ring up. AMD predicts future sales growth will be moderate in the months ahead.

Economist Lakshman Achuthan, of the Economic Cycle Research Institute, says business managers will continue to increase spending--albeit at a slower pace--because they're confident the economy won't fall apart. "There's no new recession or contraction in sight," Achuthan says. Economic growth is slowing from 5% earlier this year to about 3%. "When you have that kind of deceleration, it's likely to ease inflation concerns."

Achuthan also sees the strong increase in capacity-utilization rates easing, not only because tech buyers might slow purchasing, but because the statistic reflects U.S. manufacturing, and more computer wares are produced abroad today than in the past.

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