US companies are extending the lifespan of their office computers at the economy's expense.
In the late 1990s, computers lasted as little as three years as companies rushed to keep up with changes in technology. Between 1995 and 2000, spending on information technology rose by 19 percent a year, in 2000 reaching US$583 billion, or 6 percent of the economy. Last year, such spending dropped to US$563 billion.
Information technology accounts for more than half of business fixed investment.
"The central question about the outlook remains whether business firms will quicken the pace of investment," Federal Reserve Chairman Alan Greenspan said Wednesday in testimony to the Joint Economic Committee of Congress. "Firms still appear hesitant to spend and hire, and we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance."
Companies are sticking with the PCs they bought at the turn of the century to hold down costs and because new software applications aren't straining the power and memory of their equipment. Replacement cycles have risen to four years from three in the mid-1990s. This is holding down business investment at the same time that technology gains from the last decade enable companies to operate with fewer workers, economists said.
"Business spending is going to make or break the economy in the second half of the year," said Sung Won Sohn, chief economist at Wells Fargo & Co. "A lot of businesses are saying they don't need new equipment and software."
That may be starting to turn around, according to Synopsys Inc, which makes software for designing computer chips. The company, based in Mountain View, California, said third-quarter profit will exceed analysts' estimates, and its stock rose 16 percent yesterday. Shares of rivals including Cadence Design Systems Inc and Mentor Graphics Corp also gained.
"Customers believe the worst is over," Steve Shevick, Synopsys chief financial officer, said yesterday.
Investment in computers and software hasn't increased since the end of the war in Iraq and isn't likely to do so at least until next year, analysts at Goldman, Sachs & Co said. In a survey of 100 information-technology managers in the middle of last month, the firm found that budgets this year are shrinking by an average of 3.2 percent from last year, according to analysts Laura Conigliaro and Rick Sherlund.
Capital spending will probably drop 6.6 percent this year from last and rise "slightly" next year, according to Tobias Levkovich, an institutional stock strategist at Smith Barney, based on an analysis of almost 670 companies. Investment by technology companies may drop 10 percent this year and rise almost 5 percent next year, he found.
At the beginning of the 1990s, professional desktop computers lasted an average of four years before being replaced, said George Shiffler, an analyst for computing platforms and economics research at Gartner Inc, a market-research company based in Stamford, Connecticut. By 1995-96, life cycles fell to a low of three years, he said.
Machines bought then "were being set up to be replaced" before 2000, he said, when it was feared that older equipment and software would malfunction because of programming that didn't account for a change of centuries. In 1999, the number of computers bought as replacements rose by 30 percent to 40 percent each quarter, he said.