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High Tech Hits An Air Pocket

Economic Trends

High Tech Hits an Air Pocket

The computer boom fades a bit

No one is claiming that the party is over as far as computer-related spending is concerned. According to International Data Corp., U.S. shipments of personal computers in the first quarter were up a healthy 24% over the year before. Although competitive pressures have clipped the wings of some computer producers, notably Compaq Computer Corp., most are still flying high--racking up both record sales and hefty stock market valuations.

Still, as economist Robert E. Mellman of J.P. Morgan points out in a recent analysis, the computer industry's production rate has decelerated sharply from its unusually strong pace last year (chart), and semiconductor output has followed suit. Although computer and office equipment production was still rising at a healthy 29% annual rate at last count, that is actually the slowest pace since 1994. Moreover, perhaps half the rate of increase reflects improvements in processing power rather than volume gains.

Demand-side data tell a similar story. Factory orders and shipments of computers and office equipment both rose steadily from a $9 billion monthly pace (in current dollars) in early 1997 to $11.1 billion by mid-1998, but they have stayed flat ever since.

The slowdown reflects moderating gains in sales to businesses and consumers as well as overseas, reports Mellman. Growth in nominal business spending on computers and peripherals, he notes, decelerated from a 28% annual pace in the first half of last year to just 7% in the second half. Moreover, recent surveys indicate that many small and large businesses believe their Y2K-inspired spending has already peaked and will lose steam in the months ahead.

Perhaps the most ominous development is the sharp drop in the computer industry's capacity utilization. After the Asian crisis hit in late 1997, operating rates in traditional manufacturing industries turned south in a hurry, but in computer-related businesses they stayed relatively high--until recently. Since November, capacity utilization by computer- and office-equipment makers has actually fallen below that of manufacturing in general, hitting 75.7% in March, compared with the overall factory rate of 79.3%.

The bottom line is that some of the zip has gone out of the computer business. With revenues flat and operating rates falling, pressure to cut prices will grow even more intense, and profits will be harder to come by.

Mellman adds that these developments point only to a spending slowdown--and not to an outright slump. In the U.S., the need to boost productivity in a labor-scarce environment is as strong as ever. In Europe and Japan, sales of computers have surged recently despite uncertain economic outlook. The fact is that once bitten with the computer bug, consumers and businesses have proved highly susceptible to the lure of sharply falling prices and rapid technological improvements.BY GENE KORETZReturn to top

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Social Security Is Aptly Named

It lifts half of seniors out of poverty

One result of the current Social Security debate has been to concentrate the public's mind on the true economic condition of the elderly--and to give the lie to those who describe them as "greedy geezers." While the top 20% of seniors are relatively affluent, reports the Center on Budget & Policy Priorities, almost all of the rest are highly dependent on Social Security.

In 1997, the average Social Security retirement benefit was just $765 a month, and the average check to 65-year-olds was $819 a month--a tidy sum, but hardly a bonanza. Yet, according to the center's analysis, the program provided at least half of the total income of more than 55% of senior citizens and at least 75% of the total income of more than a third.

Social Security's impact on poverty among older Americans is equally revealing. Based on 1997 Census Bureau data, the center finds that the retirement program lifted 11.4 million seniors--or nearly half of the 65-and-older population--out of poverty, cutting the elderly's poverty rate from 47.6% to 11.9%. Means-tested programs, such as SSI (Supplemental Security Income), lowered the rate still further to 10.5%--bringing it close to that of other adult Americans.BY GENE KORETZReturn to top

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