The Outlook
WASHINGTON
(WSJ - April 16)
For the Old Economy, the worst may be over. After a winter of brutal production cuts, established manufacturers are getting inventories under control and some, especially auto makers, are ready to ramp up production again.
But after making it through an Old Economy correction without, it seems, a recession, the country may be about to be smacked by a New Economy shakeout. This is uncharted territory. Information technology fueled much of the late 1990s boom and indeed made the renaissance in worker productivity possible. Now that it faces its own full-blown recession, some analysts think the hit to the economy could be more painful than what the auto sector delivered.
Since 1990, information-technology-producing industries' share of gross domestic product has risen to 8.3% from 5.8%, the Commerce Department estimates. Autos, by contrast, contribute a little more than 3%. Now, after years of torrid growth, technology has hit a brick wall.
"Never in our experience have we heard stories of prominent semiconductor makers reporting no net bookings in the quarter," Salomon Smith Barney semiconductor analyst Jonathan Joseph wrote last week. "Conditions ... are the worst that even old-timers, who have been through scores of downturns, have ever seen it." Motorola Inc.'s chief executive, Christopher Galvin, said last week: "The high-tech sector ... is already in a recession."
This bad news has long been reflected in technology stocks. But it has barely registered in the economy. Figures compiled by New York-based ISI Group show that since July, while employment in automobile manufacturing has fallen 87,000 to 942,000, employment in semiconductor and computer manufacturing and computer services has risen 92,000 to 3.07 million. Yet tech businesses have dominated layoff announcements. Last week alone, Motorola, Yahoo! Inc. and Internet-messaging-service provider Critical Path Inc. all announced job cuts.
Is more serious economic fallout on its way? Or are the industry's fundamentals stronger than headlines and stock prices suggest? Optimists note there still is deep-rooted demand for technology's cost-cutting potential, and rapid innovation causes existing equipment to become obsolete quickly, spurring replacement demand. But ISI's Nancy Lazar says, "One thing we've learned: Technology is cyclical. It's not immune to normal business-cycle phenomena. They will have to cut jobs, and it will be sizable."
The fortunes of autos and tech have parted ways in part because they have different customers. Auto makers sell primarily to consumers whose incomes, while under pressure, are still rising. By contrast, the tech sector sells primarily to businesses, whose profits are plunging. So even as auto sales have held up better than expected through the winter, IT equipment orders tumbled at an 8.5% annual rate during the first two months of the year, according to Salomon. That is hardly catastrophic; in 1990-91, orders fell by comparable amounts for four of five quarters. Still, the nonstop stream of earnings and sales warnings during the past month suggests there is no near-term letup in sight.
Sales trends are reflected in inventories. Auto-sector inventories surged during the fourth quarter and dropped in the first, while those in tech have risen even faster: Salomon economists calculate that high tech accounted for 85% of the rise in manufacturing inventories during the first two months of the year.
"This has become a two-track economy," economists at Credit Suisse First Boston said in a report. They predict Old Economy industries largely will finish working off their inventories during the current quarter, but tech production won't bottom out until the fourth quarter: "The 'newly arrived' tech sector is experiencing a good old-fashioned business cycle."
There are some factors that favor a quick end to the pain. Tech companies are slashing prices to move rapidly depreciating inventory. Computer prices plunged at a 32% annual rate during the first quarter, which "even for computers is absolutely gigantic," says Salomon economist Christopher Wiegand.
Accelerating tech deflation is one reason that "real," or price-adjusted, business investment in computers, if it is falling, isn't falling nearly as much as sales and profits at tech companies. Mr. Wiegand says this deflation also makes new equipment increasingly attractive, even to companies "in full cost-cutting mode."
Many tech companies have tried to hold back on job cuts because of the difficulty of finding skilled workers. But many companies, especially in Internet businesses, that inflated their payrolls and asset bases on visions of growth that are fading fast, have little choice but to cut jobs now. Tech employment eventually fell 3% during the 1990-92 downturn, according to ISI's figures, and the industry hadn't experienced the bubble of recent years. Ms. Lazar expects that by year end, employment will be falling from year-earlier levels.
When a bubble bursts, "the economic slowdown tends to be, if not more severe, at least more prolonged than expected," Ms. Lazar says, citing the problems of savings and loans and commercial real estate a decade ago. The same, she says, could well be true of the tech bubble this time around.
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I'm just dying to see how Bezos & his CFO arrived at those gross profit margins, and how much of AMZN's SGA expenses were capitalized or what other smoke & mirrors methods they used. Actually refreshing to see some analysts being readily skeptical of AMZN's announcement and Bezos' empty hype. |
