GETTING WORSE: THOSE WHO SAW FAST RECOVERY MUST EAT THEIR WORDS NOW
BY JENNIFER FILES/San Jose Mercury News - July 27, 2001
There still is no bottom in sight for the technology industry. As more Silicon Valley companies report second-quarter financial results and other news, the long-awaited end to the high-tech downturn falls further away.
Stock prices keep sliding, sales keep falling and layoffs continue to mount. The prevailing view on Wall Street is that recovery won't come until mid-2002, and that means that cuts made earlier this year won't be enough to get many companies through the slowdown.
And corporate executives and analysts who once predicted a quick end to the industry woes that began late last year are now eating their words.
``The `bottom' is an awkward word for all of us. We keep thinking we've seen it and then we don't,'' said Ellen Hancock, chief executive officer of Exodus Communications, the Santa Clara manager of Web sites. Exodus said Thursday that it will lay off 500 more workers. That wasn't nearly the worst news of the day.
JDS Uniphase on Thursday reported the biggest full-year loss in U.S. corporate history -- $51 billion for the fiscal year that ended June 30, including an enormous write-off related to the steep decline in its stock price. The San Jose company, which makes lasers and other parts for fiber-optic communications systems, also said it is in the process of cutting 16,000 jobs this year -- twice its earlier projections -- largely because it isn't meeting previous sales targets.
``Customers tell us `yes' and then they tell us `defer.' Customers themselves are in a quandary,'' Chief Executive Jozef Straus said.
And Hewlett-Packard of Palo Alto said it will eliminate 6,000 jobs and projected a 15 percent year-over-year decline in revenue for the quarter that ends July 31. Carly Fiorina, chief executive officer of the computer equipment company, has been backing away for months now from predictions in April that the bottom was in sight. ``I have been consistent and public for several months now that I do not expect a second-half recovery in 2001,'' she said.
>>These job cuts are the largest in HP's history in raw numbers, but in the early 1950s, HP laid off almost half of the workforce. It has also had smaller layoffs in the 1970s and the 1980s...Earlier this week, as another cost-cutting measure, HP sent a memo to all employees, asking them not to purchase goods and services that can be delayed until the next fiscal year. ``I basically can't order a pencil,'' griped one employee.
Wall Street is growing more pessimistic by the day.
On July 1, analysts projected that third-quarter earnings for 82 major technology companies would drop an average of 49 percent from a year earlier, according to First Call, a provider of financial information. By Thursday, they were forecasting a 61 percent drop. The analysts still expect positive earnings growth by the first quarter of 2002 -- but only a 17 percent increase, half the 32 percent rise they predicted July 1.
``Technology estimates are still in free-fall and there's no reasonable recovery anticipated until at least the second quarter of next year. The best you could hope for is that we might get some improvement in the first quarter, but I personally doubt it,'' said Chuck Hill, research director for First Call.
July 28, 2001
Tech drags U.S. economy to 8-year low
BY DAVID A. SYLVESTER / San Jose Mercury News
The U.S. economy teetered on the edge of its first Silicon Valley-led recession ever as a sharp plunge in business investment brought overall growth this spring to its slowest rate in eight years, government data showed Friday.
The gross domestic product, a measure of the total U.S. output in goods and services, grew at an annual rate of a feeble 0.7 percent for the second quarter, the slowest since the first quarter of 1993. Outside of a recession, the economy has grown that slowly only twice in the past 19 years.
The biggest plunge came in business spending on equipment and software, the kinds of products made by Silicon Valley tech companies. This dropped by a startling 14.5 percent.
``That's why the valley has been hit as hard as it has,'' said Richard Carlson, chairman of Spectrum Economics of Mountain View.
The sharp decline in overall business investment shows that the current slowdown is occurring the opposite way from those since the end of World War II. In the past, consumers were the first ones to kick off the process by increasing demand so much that prices started rising. Then the Federal Reserve System raised interest rates to cool demand, discouraging spending and prompting firms to cut back production and lay off employees.
But this time, corporations, particularly the tech companies in Silicon Valley, are ahead of consumers in feeling the pinch. The drop in business spending hammered business profits first, while consumers have kept spending.
However, this GDP report is the first clear sign that consumers are now responding to the slowdown by reducing spending. Consumer spending cooled in the second quarter to 2.1 percent growth, about twice to three times slower than it was in the past two or three years. That's especially worrying because consumer spending makes up two-thirds of the economy, and consumers were the ones propping up growth.
In addition, the personal savings rate -- the amount of income that consumers have left over after they've spent -- was positive in the second quarter and is now growing at 1.2 percent.
Still, it's quite possible the economy is even weaker than the GDP figure shows. These numbers are always revised as better data becomes available in the coming weeks. And Anirvan Banerji, director of the Economic Cycle Research Institute in New York City, said some of the slightly 0.7 percent growth came from a drop in purchases of imports and an increase in government spending. Neither of these show underlying strength in the economy.
``There's no light at the end of the tunnel for businesses,'' he said. ``Do you think the third quarter is going to be better than the second?''
ECRI has predicted a U.S. recession since March, and its weekly indicator for the direction of the U.S. economy has steadily shown a contraction through the end of the year.
One positive sign in the report is that inflation appears to be slowing. The broadest measure of inflation in the prices paid by U.S. residents rose at only 1.5 percent in the second quarter, compared to 2.7 percent in the first quarter. Taking out food and energy prices, inflation rose at only 1.1 percent. The slowing of inflation gives the Federal Reserve Board room to cut interest rates further when it meets in late August, something that Fed Chairman Alan Greenspan told Congress the board may consider.
The report also revised previous GDP figures to show that the economy grew last year at an annual rate of only 4.1 percent, not as strong as the 5.0 percent previously estimated. And equipment and software sales over the past three years were also not as strong as previously thought. |
