Computers Put The Zip In The Gdp

It's easy to observe the growing importance of computers in our personal lives. Some 40% of American households now have computers. Most workplaces have them. They're even on airplanes, where invariably someone is working on a spreadsheet or playing You Don't Know Jack. Less obvious to the eye, however, is the growing macroeconomic importance of the computer industry. Sales of computers accounted for one-third of all U.S. economic growth over the past year. Just as important, falling computer prices kept inflation in check.

Let's go to the numbers. Spending on computers now accounts for just under 3% of GDP, compared to 3.5% for autos and light trucks. Growth has been phenomenal, with expenditures on computers up sixfold since 1990. Next year for the first time ever, computers will probably surpass autos as a percentage of the U.S. economic pie.

But it is in pricing that computers may be having the biggest macroeconomic impact. Despite soaring demand, prices for computers have actually fallen over time. Prices are down 32% from a year ago this October, as measured by the GDP price deflator, which adjusts for quality changes--the fact that consumers get more power for their dollar.

Throughout the current five-year economic expansion, Cassandras ranging from Wall Street bond traders to regional bank presidents at the Federal Reserve have been warning of impending inflation. Computer deflation is one major reason why it hasn't appeared. A handful of economists, including Fed Chairman Alan Greenspan and Edward E. Yardeni at Deutsche Morgan Grenfell/C.J. Lawrence Inc. argue that computer-led economic growth is less likely to generate inflation than traditional housing or auto-led growth.

So along with the fun--and anxiety--of buying computers to put under the Christmas tree, keep this in mind: The bigger the share of the economy for computers, the faster the economy can grow without triggering inflation .

Before it's here, it's on the Bloomberg Terminal.