The new business cycle: the impact of the application and production of information technology on U.S. macroeconomic stabilization

Business Economics, Oct, 1997 by Martin Fleming

The second set of theories that surround the benefits of IT relate to stronger long-term growth, irrespective of how events may unfold over the course of the business cycle. These theories argue that IT will provide a significant boost to long-term growth and, consequently, to the living standards of the industrialized nations. In this view, there is no rationale to explain the continuing rise in joblessness in the European countries and the continuing stagnation in real medium incomes in the United States, which relies upon the increased use of IT in economic activity. Sustained economic growth requires a continuous shift in resources from declining to expanding sectors. While certain individuals might suffer as sectoral shifts occur, technological change is an unmixed blessing for the economy as a whole. The resulting winners and losers may produce a widening gap in income inequalities and job prospects, but flexible product and labor markets will provide the best performing economies over the long term.

The unmixed blessing of technological change is somewhat difficult to square with recent economic history. In the United States, the recent twenty-year period of intense technological change has also been a period of sluggish economic growth, especially when compared to the period immediately following World War II. The reasons for such a slowdown are not clear and could simply reflect the unsustainability of the earlier pace of growth. However, it is also possible that the benefits of technology are disproportionately distributed to the users and consumers of technology. When consumers realize the benefits of technology in the form of lower prices and increased consumer surplus, producers suffer from decreased income and wealth. The redistribution of these benefits could be measured as slower aggregate growth, the redistribution of incomes, or both.

Notwithstanding the ambiguous interpretations of these theories of the impact of IT on the U.S. macroeconomy, it does seem possible that the IT sector has evolved to the point that it is an important driver of economic activity and much more important than it was at any time in the past. Evidence related to this hypothesis can be gleaned from the results of a recent analysis undertaken at the Bureau of Labor Statistics (BLS). Berman and Pfleeger employ the BLS model and forecast output and employment in 183 sectors of the U.S. economy to determine which sectors fluctuate with aggregate real output and which do not. Berman and Pfleeger examined this relationship in two periods. First, the period 1977-94 was used to benchmark the correlation between industry demand and aggregate output. Second, the period 1994- 2005 was examined to determine if changes are projected to occur in the sectors of importance.

It is of interest to determine the sectors that are likely to experience the largest gains or losses in correlation with aggregate demand. Berman and Pfleeger calculate correlation coefficients between each sector's output and aggregate output for both the historic period and the forecast period. The result is two sets of 183 correlation coefficients. For each sector, the difference between the correlation coefficient for the historic period and the correlation coefficient for the forecast period has subsequently been calculated. While quite certainly a high degree of correlation between a sector's output and that of aggregate demand does not imply that activities within a sector are causing aggregate economic fluctuations, those sectors whose output is most highly correlated with aggregate output must be viewed as critical sectors for overall economic activity. Understanding economic conditions within such important sectors is vital to anticipating future levels of economic activity and to policymaking.