T he performance of the U.S. economy over the past several years has been nothing short of remarkable. From 1995 through 1999, real gross domestic product rose at an annual rate of more than 4 percent (based on annual average data), a notable step-up from the pace during the first four years of this expansion . The rapid advance in recent years has been driven by a rebound in the growth of labor productivity. In the nonfarm business sector-the part of the economy on which productivity studies typically focus-output per labor hour rose at about a 2 1 ⁄2 percent annual rate between 1995 and 1999, nearly double the average pace of the preceding 25 years. Determining the source of this resurgence ranks among the key issues now facing economists.An obvious candidate is the high-tech revolution spreading through the U.S. business sector. In an effort to reduce costs, to coordinate large-scale operations, and to provide new or enhanced services, American firms have been investing in information technology at a furious pace. Indeed, business investment in computers and peripheral equipment, measured in real terms, jumped more than four-fold between 1995 and 1999. Outlays have also risen briskly for software and communication equipment, which are crucial components of computer networks.We first examined the link between computers and growth in Oliner and Sichel (1994). At that time, many observers were wondering why productivity growth had failed to revive despite the billions of dollars that U.S. companies had poured into information technology over the preceding decade. We concluded that, in fact, there was no puzzle-just unrealistic expectations. Using a standard neoclassical growth accounting framework, we showed that computers should not

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The performance of the U.S. economy over the past several years has been remarkable, including a rebound in labor productivity growth after nearly a quarter century of sluggish gains. To assess the role of information technology in the recent rebound, this paper re-examines the growth contribution of computers and related inputs with the same neoclassical framework that we have used in earlier work. Our results indicate that the contribution to productivity growth from the use of information technology -- including computer hardware, software, and communication equipment -- surged in the second half of the 1990s. In addition, technological advance in the production of computers appears to have contributed importantly to the speed-up in productivity growth. All in all, we estimate that the use of information technology and the production of computers accounted for about two-thirds of the 1 percentage point step-up in productivity growth between the first and second halves of the decade. Thus, to answer the question posed in the title of this paper, information technology largely is the story.

We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. We find that investment responds significantly -in both economic and statistical terms -to our new measures of fundamentals. Our estimates imply that the elasticity of the investmentcapital ratio with respect to a change in fundamentals is generally greater than unity. In addition, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms -those paying no dividends and those without bond ratings -that have been found to be "liquidity constrained" in previous studies. Our results cast doubt on the evidence for liquidity constraints from the many studies that have used Tobin's Q to control for the expected returns to investment. JEL Classification: D92, E22.