Why the Recovery Finally Looks Real

Early signs indicate that another sustained period of innovation-driven growth could be in the offing

By Michael J. Mandel

Good things come to those who wait. For the first time since the tech downturn hit in 2000, the U.S. economy seems to be picking up speed. The combination of low interest rates and big tax cuts means that consumers have the ability and the will to buy. Meanwhile, corporate executives are finally waking up from their long funk and realizing that it's sometimes necessary to spend money to make money.

That's why it makes sense to be optimistic about the second half of the year. For example, economists at UBS Securities project that the economy will grow at a 4% rate in the third and fourth quarters of 2003, up from roughly 2% in the first half. Other forecasters are roughly in the same range.

With the near term brightening, it's time to start thinking about the next few years: Are we going to have a strong innovation-driven boom like the 1990s, or will growth crawl along at a 2.5% rate or so? That's an important topic for everyone, whether you're an investor hoping for another stock-market boom or a worker hoping for another few years of good job creation, tight labor markets, and rising wages. And the early signs suggest that another period of strong innovation-driven growth is well within reach.


  There's no guarantee, of course -- one of the distinguishing features of technological change is its unpredictability. Nevertheless, the underlying fundamentals are in place. One positive indicator is the revival of the information-technology industry, which was one of the key forces for growth in the 1990s. Corporate spending on tech is already up by 7% over the last year, according to government statisticians. And the durable-goods report from the Census Bureau, released Aug. 26, showed that new orders for computers and electronic products rising at a 33% annual rate over the last three months.

If current trends continue, by the end of 2003, business tech spending could be up by 10%, vs. the previous year. That's quite a respectable pace. In fact, it's faster than tech spending increased in the early 1990s, during the recovery from the previous recession.

Another piece of goods news is that the venture capital and the initial public offering markets -- which help finance innovation -- are showing some small signs of life again. Venture investments were up a bit in the second quarter of 2003, compared to the previous quarter. And the pace of IPOs, while still slow compared to the halcyon days of 2000, is picking up.


  Equally important, the VC investments and IPOs are spread across a wide range of industries, rather than just being concentrated in information technology. That's crucial, since the next strong expansion will have to be built on innovation across a broad range of areas, such as biotech and energy.

There are still a few cautionary notes to consider. The stimulus from monetary and fiscal policy coming out of Washington could very well be exhausted before the next wave of innovation arrives. It may well feel like a stop-start economy in 2004, and even in 2005, with bursts of growth interspersed with periods of weakness. That's similar to 1994 and 1995, before the last boom really got going, when the economy grew at an annual pace of 5% or faster in some quarters, and as slow as 0.8% in others. There are also signs that the housing market may be peaking just the recovery is picking up steam (see BW Online, 8/27/03, "Housing's Threshhold of Uncertainty").

Still, in the end, economic growth is about innovation -- coming up with new ideas, funding their development, and turning them into profitable products and services. And that's where the U.S. economy shines.

Mandel is chief economist for BusinessWeek in New York

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