Technology & the Economy: An Attempt at Pattern Recognition

This report is a reprint of a section from The Technology & Internet IPO Yearbook: 7th Edition — 21 Years of Tech Investing... (published on 4/5/01). In this report, in an effort to determine how long the current across-the-board downturn in technology momentum may last, we drill down on historical data/patterns related to IT spending and inventory growth; technology and telecommunication services financing; and stock market performance. Morgan Stanley economist Richard Berner’s report: The IT Crash: How Big? How Long?, published 2/27/01, is included beginning on page 22 of this report.

IT spending growth is tied to the economy (and vice versa) and while we believe that IT spending growth could be below GDP growth in 2001, we believe it should go back to a more normal trend of growing faster than GDP growth in 2002 or 2003. Over the past forty years, when IT spending growth has fallen below GDP growth it has taken, on average one-to-two years for it to again exceed GDP growth.

'Excess' IT spending from 1998 to 2000, based on a forty-year trend line analysis of IT spending, may have accounted for 1% of total IT spending and 9% of the increase in annualized IT spending. Specifically for 2000, 'excess' IT spending may have accounted for 6% of total IT spending and 35% of the increase in annualized IT spending.

'Excess' IT spending from 1998 to 2000 related to technology and telecom services 'overfinancing,' may have accounted for 2.5% of total IT spending and 16% of the increase in annualized IT spending. Specifically for 2000, 'excess' IT spending related to technology and telecom services 'overfinancing' may have accounted for 4% of total IT spending and 21% of the increase in annualized IT spending.

It appears that the direct impact of the recent powerful technology and telecom services financing cycle on U.S. IT spending, while significant, is not as high as many believe. We have concluded that the biggest booster to IT spending in 2000 and 1999 was, simply, enthusiasm (translated into spending) from businesses about the positive prospects for new technology deployments.

We believe in pattern recognition and our review of historical data leads us to believe that it may take two-to-six quarters to recover from the downcycle for IT spending. Shares of the leading technology companies will likely begin to discount a recovery two quarters before it occurs.

Technology & the Economy: An Attempt at Pattern Recognition – Part 1 of 1 (27 pages)