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

1. Monetary policy has been applied with greater skill, knowledge and success, at least over the past ten to fifteen years. Federal Reserve policymakers seem to believe that seeking to achieve a more modest growth path will contribute to prolonged expansions and recessions that can correct imbalances in a briefer period.

2. The average growth rate has been lower over this period. Independent of the reasons for the slowdown, slower long-term growth could also contribute to more stable short-term fluctuations as expansionary pressures are diminished.

3. A more competitive business environment also appears have developed on the past two decades. While an understanding of the economic growth implications of increased competition are beginning to be understood, it does seem that increased competition has contributed to a wider geographic spread of economic activity, reduced inflationary pressure, and a transference of economic value from producers to consumers and thus slower income growth.

The Contribution of Information Technology Applications to Macroeconomic Stability

Notwithstanding these other interrelated factors, the increased production and application of IT solutions also appear to have contributed to a more stable U.S. economy. The application most frequently cited as contributing toward stability is a fundamental redesign in the way in which materials are purchased, ordered, delivered, stored, and incorporated into the manufacturing production process. These processes are often referred to as supply-chain management. In addition, the manner in which manufactured products have been designed, built, and delivered to customers has also been fundamentally redesigned. From a macroeconomic perspective, these changes can be seen in the inventory data and, in particular from the more stable behavior of the inventory/shipment ratios, especially over the most recent fifteen years. The better and more precise control of materials and finished product inventories is a direct result of the development of solutions by IT vendors to meet the needs of manufacturers who are seeking to reduce cost at the microeconomic level.

It is a reasonably well-established empirical fact that inventory accumulation and decumulation are major contributors to recessions in the U.S. economy. However, it seems likely that inventory management also contributes to the length of expansions. The distinction is between the depth of recessions and the length of recoveries. Dan Sichel shows that inventory management plays an important role in business cycle dynamics, especially in periods of expansion. By contrast, Donald Allen reviews the application of IT to inventory management in some detail and concludes that their impact on U.S. macroeconomic stability, in terms of recession depth, has been ambiguous. However, because IT applications in inventory management can contribute to faster response of production to changes in demand, Allen does believe that improved inventory management can result in reduced "boom-bust cycles" but not necessarily more shallow recessions.