IT Investments: The Big Ramp Up

It’s patently obvious that US businesses use a lot more IT now than they did ten or twenty years ago, but has the increase been sharp or steady?  Spiky or smooth?  And while it’s true that there’s more IT inside companies now, it’s also true that there’s more of everything else, too —  more people, more buildings, more capital equipment.  Businesses in a country with a growing labor force and a growing economy would be expected to have more of all of these inputs over time.  So it’s important to analyze the growth of IT over time in the context of the growth of everything else.

The  US Bureau of Economic Analysis divides the US economy into 63 industries and publishes data on fixed assets by year for each of them.  This ‘Tangible Wealth Survey,’ which is currently available for 1987-2004, tracks assets in three broad categories —  IT, physical plant (like factories and office buildings), and equipment.  The BEA also tracks employment by industry.

These data have a few nice properties.  They’re defined and captured consistently over time by the same entity, and they’re independent of whether companies expense or capitalize their assets.  They’re also available in both current and historical dollars.

So what do they reveal about the rise of IT over time?  The figure below shows the amount of corporate IT per full-time employee (FTE) across the entire US economy from 1987 to 2004 (this graph uses historical IT costs, which are lower than current ones).  By this measure, IT intensity in American business more than tripled within twenty years, from $800 per employee to over $2600 (click on the graph to see a bigger version). 

The graph also shows that from 1987-1995 US businesses added IT at the constant rate of about $84 per worker each year.  The line remains pretty straight from 1995-2000, but its slope increases; businesses gained about $230 of IT per worker annually during this period.  US companies definitely stepped on the gas pedal of IT during the latter part of the decade, but they didn’t slam it to the metal.   The increase in IT intensity is steady, rather than bursty.

The ‘tech wreck’ of 2000 and recession of 2001 interrupted this steady increase for only two years.  By 2004, IT per FTE was the highest it had ever been.

The figure below is another view of smoothly increasing IT intensity throughout the economy.  It plots IT’s percentage of total spending on tangible wealth each year, together with the equivalent percentages for equipment and plant (the three values for each year sum to 100).  IT’s share of the total increased over 10% during this period.  This growth is remarkably linear, and the post-2000 dip vanishes (this is because investment in all types of fixed asset slowed down for a couple years.). 

Taken together, these graphs show clearly that IT has become a much more important component of the US economic engine over the past twenty years.  This blog examines that component, explores how it works, and discusses how to get the most out of it.