Don't Bet on a Tech Rebound

With technology investment almost certain to fall this year, stock market analysts are hoping for a strong rebound in 2002. They are likely to be disappointed. That's the finding of research by Jan Hatzius, a senior economist at Goldman, Sachs & Co. The evidence of the past three decades offers no support for the notion that a sharp pullback in tech spending is typically followed by a vigorous recovery. It's possible that tech spending may increase a bit faster than the economy as a whole next year, but history suggests it still won't be a powerful engine of growth.

Tech investment, which includes computer hardware, software, and communications equipment, has increased at an average rate of 9% in the first year following a recession or an economic slowdown (chart). It's not until well into the second year of recovery that tech growth reaches its long-term trend, about 14% for the 1968-2001 period.

There's no reason to think the severity of the current belt-tightening will set the stage for an unusually strong upturn. Looking at the previous tech pullbacks and the recoveries that followed, Hatzius finds "no correlation between how quickly things contracted and how powerfully they rebounded."

To be sure, tech investment is likely to grow somewhat faster than overall gross domestic product early in an expansion. Economic output usually reaches its long-term trend rate of 8% growth, not adjusting for inflation, in the first year of an upturn. That means tech growth--expanding, on average, at its more rapid 9% clip by this time--is giving some gas to the economy.

The real jolt from tech spending comes much later, when that spending growth rises above its trend level: "Tech booms occur late in the cycle," Hatzius says. With corporate profits expected to fall 6% in 2001, according to the latest Goldman forecast, Hatzius sees an extended period of weak spending ahead--"for the tech sector and for investment more generally." People like to talk about the stock market. And economists say such talk affects investment decisions: People who visit with their neighbors often or attend church regularly are about 5% more likely to invest in the stock market than others. What's more, the impact increases greatly when one looks at certain parts of the country or at the people most likely to be thinking about making a stock market investment.

These are the conclusions of a new National Bureau of Economic Research study by Harrison Hong of Stanford University, Jeffrey D. Kubik of Syracuse University, and Jeremy C. Stein of Harvard University. Some 7,500 households were surveyed at two-year intervals from 1992 through 1998. The survey is full of information on stock market participation and social activities such as church-going. It also allows the authors to take into account personal characteristics such as education and willingness to take risks.

The impact that spending time with neighbors has on stock market investing differs from state to state. Living in a state with a relatively large share of people who invest in stocks, such as Maryland or Connecticut, nearly doubles the effect that visiting neighbors or attending church has on investing compared to the average.

A similar boost to investing is found among white households with above-average wealth and where at least one adult has a high school degree. These are the families most likely to have money available to invest. Social interaction encourages them to take the plunge, the authors maintain.

Hong and his co-authors believe mingling with others helps a person gather information on investing. But there are also social benefits to holding stocks, they argue: An investor "can get pleasure from talking about the ups and downs of the market with friends who are also fellow participants," Hong explains. In this kind of a market, it's probably because misery loves company. For decades, the world's top economic journals have been dominated by U.S.-based researchers--and even more concentrated with articles by economists who got their PhDs from U.S. schools. But that dominance is starting to erode, according to a study in the Economic Journal by Martin Kocher and Matthias Sutter of the University of Innsbruck.

Kocher and Sutter look at who was writing in the top 15 economic journals between 1977 and 1997. Their conclusion: The concentration of articles by U.S. researchers has declined since 1987. In 1997, just under 66% of the articles had U.S.-based authors--down from 77% a decade earlier (chart). A similar fall has occurred in the share of contributors with a U.S. PhD, down to about 75% in 1997.

The U.S. decline is most dramatic in the journals ranked 11-15. In work conducted while their article was in the process of being published, Kocher and Sutter found that the share of U.S. authors in the top 10 journals was nearly stable across the entire two decades. But in journals 11-15, which includes the Economic Journal, the concentration of U.S. authors fell sharply in the late 1980s and 1990s--from 70% to about 35%.

The authors say this change is a sign that European universities are beginning to reap benefits from their work to improve doctoral programs and academic research over the past couple of decades. And they expect this success to spread to even the highest-ranked journals, as the brain drain slows and more non-U.S. institutions become attractive to the world's best students and researchers.

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