Is the IT Revolution Over? An Asset Pricing View

Abstract

I develop a new method that structures financial market data to forecast economic outcomes. I use it to study the IT sector's transition to its long-run share in the US economy. The method uses a model which links economy-wide growth with IT's market valuation to match transition data on macroeconomic quantities, the sector's life cycle patterns, and, importantly, market valuation ratios. My central estimates indicate that the revolution ends between 2028 and 2034 and that future average labor productivity growth will fall to 1.7 percent from the 2.7 recorded over 1974--2015. I show empirically the IT sector's price-dividend ratio univariately explains over half of the variation in future productivity growth.

Keywords: asset pricing, IT revolution, endogenous growth, financial markets

JEL Classification: E66, E23, G12, O32