Silicon Chips, Not Blue Chips, Fuel Bull Market of the 1990s

To understand why Wall Street is booming these days, look no farther than the appliances in your kitchen and the computer on your desk.

America is in what some analysts term a new "Industrial Revolution," one in which technology delivers dramatic improvements, not just to the countertop and the desktop, but to the entire spectrum of the workplace.

The new efficiencies from technology have driven stock prices to record by driving American corporations record profits, say many analysts.

"It's the wholesale restructuring of the US economy," says Bruce Lupatkin, director of research at Hambrecht & Quist, an investment firm in San Francisco. "And in large part, it's being enabled by technology."

"We are at the very early stages of this technological revolution," says Robert Walberg, chief equity analyst for Briefing.com, an economic research analysis firm on the Internet.

Above-average growth should last for several years, he adds.

Technology plays a direct role in Wall Street's boom. High tech companies represent a much larger share of the stock market than they did 15 years ago. Companies such as Microsoft and Intel that were tiny in the early 1980s have become the industrial giants of the 1990s.

Technology companies have dominated the bull market of the 1990s. This year, for example, the group is up 12 percent, slightly outpacing the broader market and dramatically ahead of most other sectors except finance.

Because technology stocks tend to be fast growing, they, along with the health- care sector, have been the major drivers in the market, says Robert Dickey, managing director of technical analysis with investment firm Dain Bosworth of Minneapolis.

Today's standard computer chip is 500 times more powerful than its first incarnation a quarter-century ago. It has become cheap enough to turn computers into household appliances.

Where analysts once debated whether the world would ever need more than a few hundred computers, some analysts now estimate more than 1 billion computer users by 2005.

And, as their size has shrunk, computer chips have insinuated themselves into virtually every conceivable machine and device.

Everything from factory equipment to cars and appliances run more precisely and efficiently because of this spread of computer technology.

But it's hard to gauge the importance of technology's indirect economic effect because of something known as the productivity paradox.

Here' s the problem: Although technology continues to advance inexorably, workers in the United States have raised their productivity only slightly. True, the rate is better than in the 1970s, when productivity growth was anemic. But it's nowhere near the 2.5 percent annual growth Americans saw during the 1960s.

A growth rate of 2.5 percent might seem small, but compounded year after year, it can provide dramatic benefits.

One of the most important is that more productive workers can earn more money without raising the employers' costs. This keeps a lid on inflation.

Last Wednesday, the US Labor Department reported that labor productivity grew 2 percent in the first quarter of 1997, but analysts cautioned against making too much of quarterly results, because they fluctuate too much.

While technology has created greater efficiency in manufacturing, "where we are still floundering is finding how technology can be used in this knowledge world," says C. Jackson Grayson, founder and chairman of the American Productivity and Quality Center in Houston.

If technology can't make knowledge workers more productive, then much of the anticipated technological gain will be lost, he adds.

Some economists believe the office-worker gains are already there, but the tools to measure them are inadequate. Others argue that non-technology factors play a bigger role in the stock market boom.

Mr. Grayson, for example, points to three such factors: the quality movement in the US, employee-involvement programs, and benchmarking tools that have allowed employers to compare themselves to the best industry practices.

Companies have to use technology wisely to reap its benefits, he adds. In some workplaces "everyone was wired, they had computers, they had high-speed modems. But no one knew how to use them."

So is Wall Street justified in using the technology revolution to push stock prices higher? Or is it anticipating a revolution so far incomplete? Perhaps a little of both.

"Wall Street always anticipates," says F. Gerard Adams, economics professor at the University of Pennsylvania in Philadelphia. "The market has very quickly capitalized the anticipation of a better economy."

"But we are going to have headwinds along the way," says Mr. Lupatkin of Hambrecht & Quist. But "I would say we are early in the cycle" of the technology revolution.