Investors seem to fear a hard landing, but the evidence for
one is close to nonexistent. Although the tech-dominated NASDAQ
has had some rough going, orders for computers were up
by 34% from August 1999 to August 2000, and telecom-equipment
orders advanced by 19%. That isn’t the image of a tech
sector that’s falling apart. Meanwhile, consumer spending appears
to have grown at a 5% rate in the third quarter. The economy
has lost some momentum, but remains healthy, in our
view. We still expect GDP to increase by nearly 4% for 2001.
• Our benign view of the world is based on the belief that the
New Economy is putting down ever-deeper and broader roots.
Specially, we believe that productivity gains will remain
strong, leading to rapid non-inflationary growth and decent
profit margins. We will be wrong if productivity gains suddenly
start to flag. Third-quarter productivity probably grew at
about a 3.5% rate, faster than GDP.
• Technology spending is at the center of the productivity revolution.
Our work shows that an acceleration in tech spending
now tends to lead to an acceleration in productivity within years.
Because tech spending is up by 27% on a year-to-year basis –
fastest pace of the expansion – we believe that structural
productivity gains are pretty much a certainty for 2001 and even
2002. What’s our 200 I forecast for tech spending? A somewhat-
slower but brisk increase of 22% in real terms.
• One thing that’s worrying tech-sector observers is the
euro. Tech has the highest European exposure of any S&P sec-
tor. Currency translations reduced S&P 500 EPS growth by
about three percentage points in the third quarter; logic
suggests that the figure was larger for tech companies. Based on
the assumption that the euro will stabilize, the adverse
currency effect will probably be only half as strong in the fourth
quarter; it should be neutral by the first quarter of 2001.
• The job market shows neither excessive weakness nor
strength. Stripping away special factors, September payrolls rose
by 204,000 jobs, in line with the performance so far this year. The
unemployment rate fell to 3.9%, but only because the labor force
temporarily shrank. Wage pressures are contained: hourly wages
were up by only 0.2% for September and by 3.6% on a year-to-
year basis, in line with their rate for the past five years.
