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Church Of The
Swimming Elephant


Office of the Press Secretary

For Immediate Release
June 5, 2000

Background for Digital Economy 2000 Report

This year's "Digital Economy 2000" report was preceded by reports in both 1998 and 1999 that were called "The Emerging Digital Economy." The term "Emerging" has been dropped because the digital economy has now emerged. While the report updates last year's report, it also covers significant new ground. Highlights include:

-- IT industries share of the economy has now climbed to an estimated 8.3 percent in 2000. Despite this relatively modest share, IT industries have contributed about 30 percent of U.S. economic growth since 1995. (That is lower than last year's 35 percent estimate, even though IT growth remains as strong as ever. The IT share is lower than last year's estimate because BEA has raised its estimate for growth in the non-IT part of the economy.)

-- Technological advances have dramatically lowered the costs of computers and communications Declines in computer prices, which were already rapid-roughly 12 percent per year on average between 1987 and 1994-accelerated to 26 percent per year during 1995-1999.

-- Falling IT prices and a healthy economy have spurred dramatic growth in business investment. Real business investment in IT equipment and software more than doubled between 1995 and 1999, from $243 billion to $510 billion. Complementing investment in hardware, the software component of these totals increased over the period from $82 billion to $149 billion. (IT accounts for two thirds of the growth in overall business investment in recent years. This is up from last year's estimate of three fifths largely because of the new treatment of software as investment.)

-- IT industries have also been a major source of new R&D investment. Between 1994 and 1999, total U.S. R&D investment increased at an average annual (inflation adjusted) rate of about 6 percent-up from roughly 0.3 percent during the previous five-year period. The lion's share of this growth-37 percent between 1995 and 1998-occurred in IT industries. In 1998, IT industries invested $44.8 billion in R&D, or nearly one-third of all company-funded R&D.

-- IT has been at the center of the improved performance of the economy. Research by the CEA, CBO, the Federal Reserve, and prominent outside economists has consistently found that IT accounts for half or more of the recent acceleration in U.S. productivity growth-from 1.4 percent per year during 1973-1995, to 2.8 percent since 1995.

-- The Internet has been both cause and effect of the economy's renaissance. Like the rest of the economy, the Internet has flourished as technology has dramatically lowered the costs of computer power, data storage, and connectivity. At the same time, since 1993, commercialization of the Internet has made the advantages of electronic commerce and electronic business practices-once available to only of the largest companies-more affordable to small and medium sized firms.

-- The decline in IT prices has directly lowered inflation by an average 0.5 percentage points. By raising overall productivity growth, IT has also contributed indirectly to reduced inflation in the rest of the economy. Contrary to all recent expansions, inflation has been falling throughout this expansion. Even excluding the falling prices in IT, inflation in the rest of the economy has been falling.

-- In 1998, the number of workers in IT-producing industries, together with workers in IT occupations in other industries, totaled 7.4 million or 6.1 percent of all American workers. Growth in the IT workforce accelerated in the mid-1990s, with the most rapid increases coming in industries and job categories associated with the development and use of IT applications.

-- Employment in the software and computer services industries nearly doubled, from 850,000 in 1992 to 1.6 million in 1998. Over the same period, employment in those IT job categories that require the most education and offer the highest compensation, such as systems analysts and computer scientists, engineers and programmers, increased by nearly 1 million positions or almost 80 percent.

-- In 2000, the number of people with Internet access will reach an estimated 304 million people world-wide, up almost 80 percent from 1999. In the past year, the number of Americans online rose by 40 percent. In the rest of the world, however, Internet access grew even more quickly. For the first time, the United States and Canada now account for less than 50 percent of the global online population.

-- There is growing evidence that firms are moving their supply networks and sales channels online, and participating in new online marketplaces. Firms are also expanding their use of networked systems to improve internal business processes?to coordinate product design, manage inventory, improve customer service, and reduce administrative and managerial costs. Nonetheless, evolution of digital business is still in an early stage.

-- U.S. economic performance in recent years contrasts sharply with our own recent history and with other industrial countries that may readily purchase IT on world markets. The strength of U.S. investment in IT has been spurred in part by sound budget policies, cooperative monetary policy, a pro-competitive regulatory environment, and a financial system and business culture prepared to take risks.

Digital Economy 2000 arrays compelling evidence that the U.S. economy has crossed into a new era of greater economic prosperity and possibility, much as it did it did after the development and spread of the electric dynamo and the internal combustion engine. That doesn't mean that the business cycle is a thing of the past or that we will never face another economic slowdown. What it means is that in the era of the Internet and other information technologies, the American economy may be able to achieve rates of economic growth that are higher and more sustained than in the past, with stronger income gains and lower inflation and unemployment than we have seen for a generation.


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