Was Y2K Behind the Business Investment Boom and Bust?

During the latter part of the 1990s, United States economic growth was boosted by sizable increases in business purchases of information processing equipment and software, otherwise known as high-tech capital goods. Beginning in 2000, though, firms began to curtail these expenditures. By 2001, high-tech and other forms of business investment were falling sharply. Indeed, much of the downturn in the growth of United States economic activity can be traced to the sharp decline in investment spending. Several explanations have been offered, from the acceleration in labor productivity -- the so-called "New Economy" story -- to the stock market surge and subsequent collapse. One explanation that has not been explored in much detail is the surge in business purchases of hardware and software in preparation for the century data change (Y2K). Because many information processing systems and much of the hardware and software were not Y2K-compliant as late as 1998, it was thought that business investment in high-tech equipment and software would increase appreciably to fix this problem. Although solid Y2K spending data are lacking, the evidence presented in this paper indicates that the magnitude and timing of Y2K-related expenditures make it unlikely that the investment boom and bust was a Y2K event.