Forecast: Recovery to bloom in spring
ECONOMIC DOWNTURN SHOWS SIGNS OF SLOWING
BY DAVID A. SYLVESTER
Published Sunday, Dec. 9, 2001, in the San Jose Mercury News
www0.mercurycenter.com
The first signs of an economic recovery in Silicon Valley -- and the nation -- are now emerging in classic fashion: The spate of bad news is slowing down.
Companies are still laying off employees, but at a slower rate. The semiconductor industry is still operating at a low level, but orders and sales are showing the first signs of improvement. Personal computers are selling better than expected because of brisk holiday demand. And nationally, the unemployed are showing up and asking for jobless benefits at a slower rate.
But there's still reason for worry. Some experts think this recession has not been long enough to correct the excesses of the 1990s -- rising consumer debt and overinvestment among businesses.
Even the stock market -- which historically foreshadows economic recovery by six to nine months -- is showing new signs of life.
``We're at a critical moment here,'' said Doug Henton, president of Collaborative Economics, which studies the Silicon Valley economy. ``I'm not saying the recession is over, but we may be on the cusp of coming out of the flattening period. We're a lot better off than we were two months ago.''
The conclusion among experts: If the economy were a car, it's now at a yellow caution light that could change back to red, or turn green as early as next spring.
The sudden change also is signaled by one of the most important gauges of the economy's direction, the Weekly Leading Index designed by the Economic Cycle Research Institute in New York. It's designed to capture the earliest signs of change. This index jumped to 118.4 on Friday, the highest level since before the Sept. 11 terrorist attack.
Still, Anirvan Banerji, director of the institute, remains cautious.
``It's a good sign,'' he said. ``We're taking it more seriously. The question is: How much can you read into a six-week uptick? Not much.''
For the national economy, pitfalls remain ahead. Employment data shows that both manufacturers and service industries reduced their workforces in November, a sign that the energy of the contraction is far from spent.
And while the stock market is soaring, some worry that current prices are not justified by the earnings power of U.S. companies.
The stock price for the average Standard & Poor's 500 company, for instance, hit a high of $47 a share for each $1 of per-share profits, nearly double the rate of early this year.
Positive signs
However, Silicon Valley's economy is showing early signs that the worst may soon be over.
Layoffs are slowing. The job cuts announced by Silicon Valley companies dropped steadily since they peaked in the second quarter. In the current quarter, local firms announced about 29,000 layoffs in their worldwide operations, down from the peak of nearly 40,000 in the second quarter.
Housing is becoming a bit more affordable. Last week, a new report showed the percentage of Santa Clara County households that could afford to buy a home rose to 30 percent in October -- the highest level since February 1999. Lower interest rates and a slight dip in the median home price accounted for the news.
Tech orders are picking up. In October, the Commerce Department reported that new orders at U.S. computer companies had risen 18 percent, the sharpest rise all year. For communications products, new orders jumped nearly 60 percent.
Semiconductor orders now appear to be rising. This week, the Semiconductor Industry Association reported the first month-to-month rise in worldwide sales in more than a year. Sales rose 2.5 percent, partly from holiday demand, a surge in cell phone sales overseas and the end of bloated inventories in some segments.
`The beginning'
``It's the beginning of a recovery,'' said Doug Andrey, the SIA's principal industry analyst. ``Our rate of decline began to improve in July and it crossed over into positive growth in October.''
Still, he warns that the first three months of a new year are traditionally weak, so the recovery would start more clearly in the spring quarter. The SIA is expecting a 6.3 percent growth in worldwide chip sales next year, a welcome relief from the worst-ever decline of 31 percent this year.
Last week, three major chip companies -- Intel, Advanced Micro Devices and National Semiconductor -- all announced that their sales had been strong during this final quarter of the year, partly spurred by holiday shopping for personal computers and cell phones.
One of the best bellwethers for the tech industry -- the semiconductor-equipment industry -- has shown improvement, even if ever so slight. Its new orders ticked up in October, although at a very low level.
Without more improvement, the industry will have to contract nearly 30 percent to balance its factory production to the flow of incoming orders.
Nationally, the economy has shown some positive developments.
Most important, an authoritative indicator on the direction of the economy is improving. The Economic Cycle Research Institute's weekly leading indicator is rising sharply for the past three weeks, possibly foreshadowing a recovery in the next three months.
``The economy is still contracting, but the rate of decline is moderating,'' said Mark Zandi, chief economist at Economy.com. ``All indications are pointing to a bottom early next year.''
Signs of false recovery
Stephen Roach, chief economist at Morgan Stanley, who proved himself prophetic by predicting the downturn, believes that the economy is signaling a false recovery, what he calls in basketball parlance, ``a head fake.''
``As I see it, there is still a compelling case that the U.S. economy will hit an air pocket in early 2002, drawing the entire recovery bet into serious question once again,'' he wrote this week.
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Contact David A. Sylvester at dsylvester@sjmercury.com or (408) 920-5019. |
