Consumer spending v. capital spending
Donald Coxe
National Post
If this is a recession, why is everyone shopping?
I live just north of the toniest shopping district between New York's Fifth Avenue and Beverly Hills' Rodeo Drive: Chicago's Magnificent Mile on Michigan Avenue. According to some surveys, street level rentals in "MagMile" approximate those for Fifth Avenue in the 40s and 50s.
Business may not be magnificent on the Mile, but it isn't dull. After a brutal winter, shoppers are enjoying the chance to return to normalcy; they're thronging the street, and they're carrying store-labelled bags. Nor are they drawn by merchants' desperation: Precious few signs in windows offer previously preciously priced goods at bargain levels.
That admittedly unscientific observation seems to be backed up by most national data on retail sales, even including automobiles. Despite all the gloomy stories of tapped-out consumers and a U.S. recession, the economy is like the gardens and forests: Those rumours of death were greatly exaggerated.
That said, the U.S. economy is struggling, and its travails threaten to pull the whole global economy down to unsatisfactory levels of growth, if not recession.
The problem is not consumers frightened by falling stock prices; it's falling prices for stocks of technology gear. The overall national level of inventories is at satisfactory levels. However, supplies of chips, computers, fibre optics, routers and gizmos in general are gigantic.
What happened was a confluence of blunders.
First, tech companies believed the hype from Wall Street that they were the new growth companies with endlessly increasing sales, when they were merely the new cyclical capital goods companies about to see the end of a very long, very strong cycle.
Secondly, major hardware and networking companies such as Cisco Systems Inc., Nortel Networks Corp. and EMC Corp. believed the hype from Wall Street that the dot-coms were real companies, instead of really big promotions. They "sold" them vast quantities of gear, and took back stock or promissory notes. In fact, the dot-coms proved to be the tip of the biggest iceberg to hit global finance in history.
As Sir John Templeton has observed, "The tech bubble was the greatest financial insanity ever in any nation in history."
Hyped by all those new era shills and mountebanks, companies multiplied like mosquitoes in a malaria swamp, their stock prices grew at cancerous rates, giving them money to spend on capital investment and advertising at rates that would make Procter & Gamble or Toyota proud.
Now that tech companies are collapsing by the hundreds, bankruptcy trustees are unloading high-end gear once valued at tens of billions of dollars for whatever they can get. As the Financial Times noted recently, Cisco Systems is forced to compete against huge quantities of its own products being offered at dimes on the dollar. What's on offer at giveaway prices is new, brand-name merchandise programmed with the best Microsoft Corp., Oracle Corp. et al have to sell.
This global fire sale comes at a time when demand for tech gear is slumping. Phone companies spent hundreds of billions of dollars to get licences to offer third-generation wireless systems, assuming unlimited demand for Internet-friendly hand-held devices. They shouldn't have listened to Wall Street's shills and mountebanks.
Nor is drooping demand limited to phone companies. Businesses generally got overstuffed with hardware because of Y2K paranoia, and are scaling back commitments while they try to find ways to put all that stuff to good use. Besides, with softening demand for nearly everything except halls to distribute bankrupts' goods, corporations see little need to buy more of what tech companies make, let alone pay the prices they want to charge.
Last year, U.S. capital spending (overwhelmingly for technology) leapt to 14% of gross domestic product, the highest since 1980 (when spending was going for oil refineries, tankers and drilling, a boom that created a bust that lasted until Saddam Hussein did Houston a big favour). This year, capital spending on technology will be in deep recession, if not depression.
That's what's wrong. It's a tech-specific recession.
Will the dying and dead dot-coms and other tech wrecks trigger a full-blown recession?
Perhaps, but more likely their corpses will provide, through slashed prices for tech gear, fertilizer for the next economic recovery. Too bad we can't throw the shills and mountebanks into the graves with them. |
