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Can tech industry save the economy?

March 15, 2009

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— Technology helped fuel the economic boom of the 1990s. Then the dot-com bust caught some of the blame for the recession of the early 2000s. If technology is so tied to the national economy, and the current recession started on Wall Street, not in Silicon Valley, can technology lift the tide this time?

Technology boosters argue that their sector certainly can help. And the stimulus bill is packed with funding for high-tech projects. But technology’s influence on the U.S. economy is not as big as you might expect.

Here are some questions and answers about the extent to which the U.S. tech industry could help turn this crisis around.

Q: What happened in the 1990s?

Investors got hooked on the idea that the Internet had given birth to a new business model in which companies could afford to grow fast operating at a loss, then turn big numbers of Web visitors into a moneymaking business later. They poured venture capital into startups and sent shares of Web companies soaring, even though many of those businesses had shaky plans at best for becoming profitable. Stock prices ballooned in part because it was hard to figure out how much this new breed of companies was worth.

A combination of high-profile dot-com failures, rising interest rates and debt and overcapacity quickly eroded the optimism. The technology-heavy Nasdaq tumbled in early 2000 and layoffs cascaded from Silicon Valley to New York’s Silicon Alley.

Q: In this recession, the recent stimulus bill pins some hope on technology to help spark a rebound. How much money in the stimulus package will flow into the technology sector?

A: Technology is at the core of many projects outlined in the stimulus bill, from education and health care to green power generation and energy grid management. The bill also sets aside funding to expand high-speed Internet access in rural and inner-city areas. By the analysis of Andrew Bartels at Forrester Research, $78 billion of the $787 billion bill is slated for projects that have an information technology component. But about $28 billion would go to technology companies that provide the hardware and services. The rest may be spent on overhead, paychecks, construction and the like.

Q: How could more spending on technology help boost the economy?

A: A few ways. Technology helps make companies more efficient. In the short term that might mean fewer jobs for humans, but if products improve and demand rises, companies tend to need more people to do things like serve customers.

And when companies do resume buying new computers, software and other pieces of technology, it will have a psychological effect on the rest of the economy, Bartels said. “It’s an indication of companies being willing to bet on the future,” he said.

Q: So how big is technology’s influence on the U.S. economy?

A: By the numbers, not huge. Bartels estimates that business spending on hardware, software and technology-related services — representing the bulk of money flowing into tech companies — makes for about 3 percent to 4 percent of the U.S. gross domestic product.

Nariman Behravesh, chief economist of IHS Global Insight, said no single sector looms large enough to drive this rebound alone. “It used to be that ‘What’s right for GM is right for the U.S. economy,”’ but no longer, he said.

Q: How has the recession affected the tech sector?

A: It’s holding up better than almost any sector of the economy, but it hasn’t hit bottom yet, said Mark Zandi of Moody’s Economy.com.

Businesses and consumers have dramatically cut back spending on technology. The credit crunch has companies worried they won’t be able to borrow money when they need it, so they’re sitting on their cash instead of investing in things like new servers, software licenses or personal computers, which are enduring their worst markets in years. Consulting services and subscription access to software, neither of which requires a huge upfront investment, aren’t getting hit quite as hard.

Q: When will the tech sector turn around?

A: The tech sector was healthy for about a quarter longer than the rest of the economy. Bartels thinks it will lag behind by a quarter on the upswing too.

Once it does turn around, Zandi said he expects it will be one of the fastest to grow, because companies that aren’t buying new technology now still want the improvements automation can provide.

“I do think technology will play a role,” Zandi said. “I do think it will be a quick source of growth coming out of recession. It may not be a catalyst for recovery, but it will be an important part of the recovery when it begins.”

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