The regional imbalances due to heavy reliance on teleconomy...
The Teleconomy
By James Glen
06/19/01 8:30 AM ET
As the downturn in the telecom industry continues to spread rapidly, the economy is suffering directly from decreased investment spending and widespread layoffs. On a regional level, those regions with a high concentration of upstart carriers or equipment manufacturers are at greatest risk for further turmoil, as bankruptcies and layoffs mount.
Last year, the broad telecom industry accounted for over $400 billion in real GDP, about 4.4% of the total. Just over one-third of the industry's real output was created by the manufacturing side of the industry, whereas the services side accounted for just less than two-thirds. The industry's contribution to total output has increased dramatically over the last two decades, increasing two-fold over the last ten years alone (see chart above).
The surge in investment in telecom equipment added approximately 25 basis points to annualized real GDP growth in each of the last two years. However, the recent abrupt pullback in spending swiftly shaved 40 basis points from annualized real GDP growth in the first quarter and will most likely continue to weigh on what little is left of the expansion.
The telecom services industry directly employs approximately 1.2 million people nationwide. Including Internet service providers, telecom services employment rises by another quarter of a million people to 1.45 million. Communications equipment manufacturing accounts for about 270,000 jobs directly. Adding industries that supply components used in communications equipment adds another 400,000 people to the total. Thus, broadly defined, the telecom industry employs over 2 million people nationwide, roughly 1.6% of total employment.
Telecom employees are highly productive, with estimated real GDP originating per employee of close to $200,000 last year compared to approximately $68,500 for all workers. Given their high productivity, telecom workers are highly compensated. As a result, lost telecom jobs are greatly missed.
Telecom employment tends to be concentrated in areas that are home to large national carriers and that have attracted upstart carriers in recent years. Colorado, for instance, ranks number one in terms of direct telecom employment as a share of total employment at more than 2%. Colorado has seen a surge in upstart carriers in recent years and is also home to established carrier Qwest Communications. Other states which have a high concentration of telecom employment include Kansas (Sprint), Georgia (BellSouth), New Jersey (AT&T, Lucent) and Texas (SBC).
Those areas that are at greatest risk from the current slowdown in the industry are those with a high number of telecom equipment manufacturing employees and upstart carrier employees. As funding dries up for upstarts, more and more struggle to make interest payments and have resorted to bankruptcy protection. Since April, at least seven upstart carriers have filed for bankruptcy protection including PSINet, Teligent, Convergent, Winstar, Actel, REAnet, and Pathnet. This trend will continue to cost the economy valuable telecom jobs.
Swift expansion of upstart telecom services carriers since the 1996 Telecom Act deregulated the industry has been concentrated in a handful of states. The change in the 5-year average of telecom services employment from 1995 to 2000 represents a decent proxy for presence of upstart carriers, as incumbents have been prone to consolidating rather than expanding over the period. Texas, Colorado, Georgia, California and Virginia have all experienced robust growth in their five-year average of telecom services employment since before the Telecom Act in 1996, implying a strong presence of upstart carriers. Indeed, many upstart carriers have sprung up in these states, and many of these now find themselves on very shaky ground.
As upstarts and established carriers cut back on spending, manufacturers have had to substantially trim production, resulting in massive layoffs. Most recently, Nortel announced it would cut an additional 10,000 workers on top of the 20,000 already announced earlier this year. Other massive layoff announcements from equipment makers include Lucent (16,000), Motorola (14,500), Cisco (8,500) and JDS Uniphase (8,000). Equipment manufacturing layoffs will likely continue, as demand will not return to the levels of the last two years for some time to come.
Telecom equipment manufacturing tends to be concentrated in places with a strong high-tech presence. California, Texas and Massachusetts all have high telecom equipment manufacturing employment exposure. Illinois also has a significant exposure to telecom equipment primarily due to Motorola's presence in the state. New Jersey is also highly exposed by the presence of Lucent.
In the near term, the telecom carriers will continue to reduce spending, forcing equipment makers to cut back production further, resulting in more layoffs. Upstart carriers will likely continue to struggle to obtain additional funding to keep them afloat, causing more bankruptcies. This will continue to weigh on the economy and particularly hamper those regions with high exposure to the industry. |
