The Colorado Software and Internet Association (CSIA) offered a breakfast program entitled “Moving Forward in Today’s Economy” and featuring IBM’s chief economist Dr. Philip Swan. Swan offered a relatively hopeful (i.e. less pessimistic) view on the economy’s future as well as providing some perspective on how the current situation came to be. Swan noted the current recession is caused by a “financial market freeze-up” as banks are unwilling to lend. Swan called the financial markets part of “the essential infrastructure” to the economy, as businesses and consumers are unable to operate normally without credit available. The problems were driven by the collapse of the residential housing market which led to uncertain value for many of the mortgage-backed assets held by the banks. Although only a fraction of the mortgage backed assets are actually toxic, the decisions to “slice and dice” assets and repackage them means that the bad mortgages can have a disproportionate effect since many different assets contain at least some toxic elements. Swan likened this effect to including one bad piece of meat in a large batch of sausage – while any one sausage probably only contains only a very small bad element no one is certain how much. Swan noted that the current recession is the first time there has been a “synchronous recession” across the globe.
With the foundation of the recession established, Swan went on to outline several indicators that can help identify the depth and length of the recession. While most indicators are way down year over year, there are several that have begun to show signs of life in the past month including the housing market – where there were more sales than starts – and an April uptick in IT orders. The TED spread (3 month T-bill rate – 3 month LIBOR), a measure of the confidence banks have lending to each other, has also improved notably from a peak of around 300 to where it closed yesterday (around 90), suggesting a freeing up of the credit market. Swan went on to propose that if the stock market has in fact bottomed out the recession will likely end in four months, as this is the historical lag between the trough of the market and the beginnings of recovery. On a less optimistic side, Swan stated that “employment will not recover rapidly” as companies are generally slow to rehire although they showed a relatively quick trigger finger for layoffs this time. On the whole Swan opined there would be “a 2nd half improvement that’s pretty noticeable in 2009.” He went on to detail some of the government efforts to combat the recession, noting both aggressive monetary and fiscal policy, the latter of which totals commitments of about $7T around the globe, designed to aid the flow of money, create jobs, and encourage spending.
Swan continued by providing some detail about the prospects for IT specifically. Of note, IT investment, which includes hardware, software and services spending, provided for 60% of the 2.5% annual productivity growth in the United States from 2001 to 2007. Given productivity increases are the key lever to long-term growth, Swan hoped companies would recognize the value of IT investment stating “you can’t come out [of the recession] in good shape if you haven’t prepared for the future.” Beyond the simple lack of money and profits to drive IT investment, also working against continued spending is the less dramatic improvements seen recently in the price-performance ratio of computing power. In the late 90’s and early 2000’s, businesses could expect to see costs of buying an equivalent computing system fall by about 20% each year while more recently this price drop is averaging only about 10% annually.
Swan concluded offering a broad outlook for 2009. While negative GDP growth is expected across most developed nations, Swan was generally optimistic that the second half of 2009 would be better than the first and expected a robust global recovery to begin in earnest in 2010. The two potential wrinkles to this expected recovery are new problems in either the commercial real estate or consumer credit markets.
CSIA, the state’s largest technology association, provides programs, workshops and major events to create connections, portals for information, as well as leadership about key issues in the industry. Upcoming is the organization’s Annual Apex Awards Celebration on June 9 recognizing the achievements of technology companies and professionals in the state.
