The information revolution is changing the nature of the business cycle in America. The shift ste...
The information revolution is changing the nature of the business cycle in America.
The shift stems from two developments. First, businesses are now able to use computers to track inventories and new orders almost instantly, and to move far more quickly to fine-tune their production and investment plans.
At the same time, the explosion of information about market developments - both on television and special business wires, and through the internet - has equipped investors and consumers to react more rapidly when economic conditions change.
The result has been to compress the time between the economy's ups and downs and, in some instances, shave the peaks and valleys, according to Richard Berner, economist at Morgan Stanley Dean Witter.
The change has implications for government economic policymakers, who are realising they must move more quickly than in the past to deal with changing conditions.
Federal Reserve chairman Alan Greenspan told Congress the US central bank already has "quickened the pace" at which it adjusts interest rates in response to changing conditions and is firing its biggest shots early in the game.
"For monetary policy to very specifically maintain the same pace of adjustment that we had in the past clearly would not be consonant with what has occurred in the structure of the economy," Greenspan said.
The spread of computers is by far the most pervasive of the changes. As recently as the 1980s, the business cycle was still slow-paced. It was often weeks before companies realised that demand had slackened, and months before they cut production.
In the interim, retailers built up huge inventories that eventually forced manufacturers to slash production until the stockpiles were sold off, often plunging the economy into recession. The 1990-1991 downturn partly resulted from just such an inventory adjustment.
Computer technology has changed that. Nowadays, data links enable manufacturers to know immediately every time a big retailer sells a box of soap. Shipping companies deliver products on demand, ending the need to maintain big supplies of parts.
Rather than striving to keep production steady no matter the consequences, companies can adjust their output gradually to keep inventories lean, substantially reducing the danger of such inventory 'overhangs'.
"It's made the economy a lot more flexible," says Ralph Kauffman, who heads the survey of non-manufacturing businesses for the National Association of Purchasing Management. "If you look at it over a long time, it's definitely a revolution," he adds.
The impact of the information explosion is more visible, if more difficult to quantify. Not long ago, business news travelled more slowly. TV ignored much beyond the stock market indices. Investors relied on brokerages to tell them what was happening.
These days, however, cable systems are laden with channels that specialise in business and financial news. The internet is awash with information. Developments anywhere in the world are transmitted instantaneously.
Partly as a result, financial markets have become more volatile and consumers are alerted earlier, and therefore able to react sooner, when there's trouble brewing in the economy.
To be sure, the technology-induced changes haven't eliminated the business cycle's downsides. As the current slowdown demonstrates, companies can still make mistakes in forecasting future demand for their products.
Greenspan points out another potential danger. With so many firms reacting to essentially the same information, they're more likely to act in synchronised fashion, further compressing the time it takes to adjust to new economic circumstances.
He also warns that the stepped-up pace of change can prompt decision makers to become so fearful of risk that they fail to take the initiative when bold action is needed. Instead, they retrench, exacerbating any economic slowdown.
Some blame the information explosion for the current dichotomy over consumer sentiment, in which surveys show that Americans are pessimistic about the economy and ready to stop spending, while sales figures continue to rise.
As Greenspan said, that dichotomy is causing problems for the Fed, which is watching the consumer sentiment and retail sales figures closely to see which provides a more accurate clue of what impact ordinary Americans will have on the real economy.
In the meantime, the economy is enjoying one benefit from the technology-induced changes: Businesses appear to be working out their excess inventories more rapidly than they have in previous downturns, according to Greenspan.
What that may mean for the current economic slowdown still isn't clear and it may take some time for the public and policy makers to get used to the new, faster pace.
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