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Based on an examination of capital expenditure patterns in the recent investment boom and bust, economist Jonathan McCarthy confirms that excessive optimism about future profits stemming from new technologies, particularly in communications industries, likely prompted an unsustainable investment surge that contributed to the 2001 recession and the subsequent slow growth.
Analyzing spending trends across types of equipment and industries, the author finds that investment trends in the communications industries had a disproportionate effect, relative to the industries’ share of the overall economy, on both the end of the boom and the onset of the bust in 2001. While spending on high-tech equipment -- computers and software along with communications equipment -- received the most attention during the boom, the health of the overall economy also spilled over into low-tech equipment, with growth in transportation equipment especially robust during the late 1990s.
Even though the investment boom is commonly thought to have played an important role in the subsequent downturn, several recent studies using aggregate data and standard statistical techniques have been unable to identify the source of the bust. This inability, combined with the importance of equipment expenditures in recent economic fluctuations, suggests that an examination of capital spending by industry, such as the one in this study, could provide new insight into the sources of the investment bust and thus the 2001 recession.
Jonathan McCarthy is an economist in the Business Conditions Function of the Research and Market Analysis Group.