Is Fosler right? Her credentials and previous record certainly provide reason to think she is. At the Conference Board, a business-research and -membership organization, she directs the group's worldwide Economics Research Program, which has created several widely watched economic measures, including the Leading Economic Indicators, the Consumer Confidence Index, and the Help-Wanted Index. In addition, Fosler was twice named Most Accurate Economic Forecaster by the Wall Street Journal, and she's a recent recipient of the Annual Blue Chip Economic Forecasting Award. For this exclusive, online-only interview, Fosler spoke recently with Optimize contributing editor Peter Krass.

Q: Your analysis of the economy relies heavily on consumer confidence. How important is this measure to corporate IT spending?

A: There's very little impact. Business buyers of tech are much more driven by the business-to-business market and by corporate profitability. That's both the ability and the willingness of companies to fund the purchase of technology, as well as the drive for companies to improve either their productivity or their product set. These, from either a strategic or cost standpoint, give them significant mandates to go out into the marketplace.

Q: Your data shows that new orders of technology, while growing modestly, are still in what you call "negative territory"—meaning they're lower than they were a year ago. What's holding back the orders?

A: The basic story is that over the last 18 to 30 months—that is, starting in 2000—we had a massive credit contraction. It was really driven by risk-aversion on the part of investors and banks. So in the second half of 2000, the commercial-paper market and commercial lending essentially dried up. Then, during most of 2001, short-term credit was being liquidated at massive levels. So the historic drop in technology spending mirrors almost exactly that drop in credit conditions.

What you had was a lot of liquidity going into the business sector: Businesses were being very aggressive about implementing systems. But they were also somewhat insensitive to the fact that their profitability was deteriorating very rapidly—in part because of the run-up in compensation costs. Their internal cash flow was being squeezed, and then they were caught with that liquidity being shut down.

It was like a 300-car collision on the interstate: The first car stops, and then all of a sudden, it's just backed up all through the system. Suddenly you can't get external cash, so you've got to take it from inside. When that happens, everything becomes discretionary. So what had been an effort to cut back expenses and hold down the internal cost structure as a matter of policy became instead a matter of survival. That meant everything became discretionary—especially business systems and technology.

Q: If the tech-spending slowdown is really a result of the credit crunch, it would seem the correct question is not "What's going to happen to tech spending?" but "What's going to happen to credit, and how will that affect technology spending?"

A: That's right. What we see is that the economy earlier in the year was back to a neutral position—we're still not extending credit, but it's neutral. But then we got Enron, Global Crossing, and the events of the late spring, and we had another contraction. Now it looks like we're moving back to neutral. The other side of that is what's happening to business balance sheets. They're reducing debt; they're putting cash on the balance sheet; they're focusing on cash earnings—and all of this is sort of good, except that it means there's not a lot of excess around for them to do business-to-business investment, and especially systems and technology, at this time.

Q: But with interest rates so low, shouldn't it be relatively easy for businesses to raise capital? And shouldn't that boost IT spending?

A: The notion that interest rates are low and therefore people must be awash in money is typically not what happens at the beginning of an economic cycle. If you look back at the early 1990s, we didn't really get to a neutral credit condition, even though we had a credit crunch that was induced by changes in Federal Reserve regulations after the savings-and-loan crisis of the late 1980s. But we didn't really get back into a neutral condition until '93 or '94. Then we got a little bit of credit availability in '94 and '95. Today it's even much more extreme, because of what we've got going on in the financial markets.

Q: Are there other economic indicators that CIOs should be watching? You already mentioned the availability of credit. What else might boost IT spending levels?

A: The key is corporate profitability. It's like consumer income: When consumers have income, they spend it. Similarly, if businesses have profit, they'll spend it, especially if the economy is growing and there's a heightened competitive environment. When that profitability begins to wane, businesses begin to pull in the reins and reduce the cost structure, even while technology may offer long-term savings and be an enabler and major support of the productivity improvements we've seen in the U.S. economy. If you don't have the money to buy the technology, all of that is academic. Also, we're no longer in a world where we're buying just a few computers here and there. Instead, companies are putting in multiyear customer-relationship management systems, Web-based purchasing systems, financial-control systems, and so on. All of these are more in the hundreds of millions of dollars than in the millions. So they're big commitments, and they're boardroom commitments.

Q: For CIOs to anticipate changes in their own companies' spending, should they look at corporate profits across the entire economy or is it enough to look at profits in one's own industry or even one's own company? A: They should look at the corporate profitability on an economywide basis. We've had a rebound in corporate profits, but it's been kind of moving sideways. With the corporate-confidence crisis this summer, nobody was doing anything; people were extremely preoccupied by what was going on in the regulatory environment. It just doesn't make people feel very long-range in their thinking.

Q: Since IT spending depends on both corporate profitability and credit conditions, is either measure more important than the other?

A: Corporate profitability is more than half the story. But it's probably not more than two-thirds of the story. I've estimated what you'd get if you were looking at just corporate profitability, using our projections of corporate profits: You'd get a 20 percent year-to-year rebound in tech spending by 2003. Unfortunately, when you lay these credit conditions over that rebound and say: "OK, what if you get that kind of profitability, but the credit markets remain relatively neutral or even rather cautious with respect to the provision of credit?" then you end up with a year-to-year gain in early 2003 only in the high single digits.

Q: You haven't mentioned overcapacity. Some technology commentators say that companies have slowed IT purchasing because they bought so many computer systems during the late '90s. They need time to digest and implement everything they already own. Does that make sense to you?

A: Obviously, there's a lot of overcapacity in the telecommunications area. But there's not so much of what I call "buying ahead." For example, prior to Y2K, there was a lot of putting new systems in place. But now, when you're in this cash-constrained environment, you have to ask yourself if you really need Windows 2000, of if you really need to move to a Pentium 4 on every machine. A lot of these upgrades are discretionary. So actually, there's pent-up demand in the technology sector.

Q: Why is that?

A: Because businesses will continue moving to Web-based activity, and also because businesses are going to change how they think about computing power on the desktop. It's no longer the hardware; it's the software and the ability to envelope whole functions. For example, with voice recognition, you can have the equivalent of a customer-service department and not have a person anywhere to be seen. It's like the freestanding, robotic manufacturing plant, where somebody turns on the switch in the morning. Obviously, that's an extreme example. But there's going to be demand to drive down labor costs when this economy begins to grow again. We're going to begin to draw down the limited labor resource that we have, and businesses are going to be pushed to release some of these large-system purchases that they've been postponing all this time.

Q: Assuming you're right, what does this economic recovery look like over the coming months?

A: One thing that businesses of all stripes will have to get used to in the next few years is a U.S. economy that's very unlikely to return to the 4% to 5% growth rates of the end of the 1990s. Those were exceptional and almost unachievable. Even if the technology cycle continues to go forward, we're just not going to have the labor content to drive the economy at those rates. We will have more moderate growth here in the United States. This means that cost saving and cost reduction—which are the basic work of the technology sector—are going to be very much in demand.

Q: This new demand for cost saving and reduction-what impact might that have on the technology sector?

A: Look at Sun Microsystems' recent announcement of cost-savings solutions and product sets. Technology companies are beginning to ask themselves if they should not be the integrators of these enabling platforms, rather than being a department store or—not even that—a specialty store for certain branches of technology. Today companies have to go over here for the hardware, over there for the communications, and over there for the software. Instead, the tech companies should start doing some bundling.