Economic Research and Data

Economic Trends

Filling you in on the current state of the economy

05.22.07

Economic Activity and Labor

Technology Investment

As is well known, spending on capital equipment, particularly information technology (IT) equipment, grew rapidly in the 1990s. In fact, growth in real IT expenditures exceeded that of other non-IT-equipment expenditures by roughly four times during the 1990s, according to a 2004 study. By 2000, IT spending represented over 40 percent of total equipment and software expenditures for business.

Then IT investment spending faltered. In the 2001-2002 period, it declined in both real and nominal terms. Particularly hard hit was communications equipment, which fell more sharply than either software or computers in real terms. Since then, IT spending has rebounded, but growth rates have been relatively mild compared to those of the 1990s. Among types of IT investments, software expenditures have risen the fastest (in nominal terms), with software accounting for over 50 percent of IT investment spending in 2005.

The first quarter of 2007, however, showed some strength in IT spending, as real investment in computers and software jumped. This was coming off a relatively flat fourth quarter of 2006. Both the weak fourth quarter of 2006 and the strong first quarter of 2007 may be due, in part, to firms delaying their 2006 computer purchases until the release of Microsoft’s new Vista operating system. Still, spending on non-IT equipment was relatively anemic, so that even with the first-quarter rise in IT investment, overall equipment and software investment spending edged up only slightly.

Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland.

Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited.

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