The Hangover
Economist David Hale says a technology glut will make this slump hard to shake

The U.S. economy is coming out of the first investment-led recession of the modern era. This downturn can’t be blamed on the usual suspects — a spike in oil prices or rising interest rates. It was a by-product of the great telecom and information technology capital spending boom of the late 1990s.

The boom began with the Telecom Act of 1996, which opened the market to hundreds of new communications companies. Together they raised several hundred billion dollars to build fiber-optic systems and rewire the country. Meanwhile, the Internet revolution was spawning thousands of new companies offering everything from cut-price CDs to business-information services.

And then came the Y2K millennium transition. It may have looked like much ado about nothing, but that’s only because American firms spent large sums rewiring their computers to ensure that they would not be disrupted by the change in the calendar to the year 2000. The boom gave the American economy an amazing new technological infrastructure.

The only trouble is, there aren’t enough businesses around to use it. As everyone knows, too many Internet companies were unable to convert pageviews into monetary transactions; they’ve since gone to ground, and spending on IT capital goods has plummeted.

A less-told story is how the regional Bell companies made it difficult for the new telecom firms to access their copper lines in homes and businesses. As a result, the utilization rate of the new fiber-optic lines is only 2% and many of the firms that built the network are sliding into bankruptcy. Telecom capital spending will therefore plunge from more than $100 billion to barely $60 billion this year.

A recovery is certainly on the way. But as long as the technology and telecom sectors — the twin-growth locomotives of the new American economy — continue to suffer the consequences of a half-decade of overinvestment, it must be a subdued affair.

David D. Hale is chief global economist at Zurich Financial Services

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