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 Contribution of Information Technology Production to Macroeconomic Stability

Because information technology had its genesis in the manufacturing sector and is still in part reliant on hardware elements, the critical role that the broad range of IT service providers play is very frequently overlooked, even by those in the IT industry. The important role of software is certainly well recognized in the industry, but the national income and product account statistics still do not adequately capture the importance of software by accounting for it as a current expenditure and not an investment. With traditional capital equipment, the hardware, the software (the internal operating instructions) and the services (the assembly and installation) are embodied in the equipment purchased. However, it is within the nature of today's internetworking computing environment that the investment made in a system consists of numerous, if not hundreds, of components. These components can be supplied by one or multiple vendors. This misperception is strengthened because the original mainframe systems were very much like traditional capital equipment. A single transaction from a single vendor yielded a fully functioning system that was quite frequently leased. From the end users perspective, what was purchased was a solution to a computing need. Mental models change slowly, and the IT industry is much different from what it was even a few years ago and very dramatically different from what it was a few decades ago.

Today there are tens of thousands of IT service providers around the globe. Most are small local firms, others are very large. IBM is the largest, but its market share is very small in the global IT services market compared with the market share of other firms its size in other industries. These service firms are not providing maintenance for systems. As the quantity of computing done by mainframes has declined, the maintenance required has declined commensurately. Today, most service consists of providing the design, implementation and support of internetworked systems. Most critically, this service is very often not provided by the major hardware vendors but by others such as consultants, systems integrators, resellers, distributors and even retailers in some cases. Table III shows the historic and projected growth rates of employment in various segments of the IT sector. While the analysis is somewhat limited because software and services are included in the same three digit SIC code, the projections do suggest that the growth of the industry will continue to be in the service segment. The projections also suggest that by the year 2005, employment in the services and software segment will account for approximately two-thirds of the industries' total employment, up from approximately one-half in 1994.

Table III

Employment by Information Technology Industry Segment
1977, 1994, and Projected 2005

                                 Employment in           Annual
                                   Thousands          Growth Rates
SIC Industry Title           1977    1994    2005    1977-    1994-
                                                     1994     2005

357 Computer and
Office Equipment             304      351     263     0.8     -2.6
366 Communications
Equipment                    279      244     210    -1.2     -1.3
367 Electronic Components
and Accessories              394      544     553     1.9      0.1
737 Computer and Data
Processing Services          187      950    1611    10.0      4.9

Source: Franklin (1995) and Bureau of Labor Statistics data for
1977.

Data for Communications Equipment industry begins in 1983.