Darkest Before The Dawn
By Erik Dellith
It just figures. The telecom sector is facing one blow after another. As if slipping demand amidst easing economic conditions was not bad enough, now it seems that the next substantial technological advance still has a few bugs in it.
If you have read this column in recent weeks, then you are familiar with my less-than-positive view for the telecom sector's near-term outlook. The current state of the U.S. and global economic environment continues to point to easing conditions, at least for now. Given the absence of any significant technological improvement and the current state of soft business activity there does not appear to be anything on the horizon in the near term to stimulate demand.
Consider the U.S. economy for a moment. Personal consumption accounts for roughly two-thirds of Gross Domestic Product (GDP), and while the American consumer has remained relatively resilient to recent economic easing, protracted weakening in the labor market can change that very quickly.
The Department of Labor recently reported on the employment situation, and, while the labor market has not deteriorated as much in the last two months as many previously thought, jobs are still being lost. This was reflected in the unemployment rate, which climbed from its 30-year low reached back in October, and, over the last two months, has hovered at its highest levels in more than two years. (Actually, April's level of 4.4% matches the February 1999 level, while March's 4.5% rate was the highest since the same reading in October 1998.)
The key point to take away from the recent labor figures is that, although the rate of deterioration might be slowing, there is still substantial loosening taking place. Because the labor markets continue to unwind, risks to the downside persist. As companies shed payrolls, consumers become less willing to go out and spend. And, given that income growth is slowing, there is a heightened chance that personal spending will ease in coming months. A slip in consumer spending would work to further subdue overall economic growth, which is already coming under pressure from cutbacks in corporate capital expenditures.
Corporate capital investment, especially in technology and telecom, remains very weak. Given the poor outlook for business activity and corporate profits for the next couple of quarters, it is unlikely that demand for existing technology will rebound anytime soon.
Naturally, this begs the question: what about new technology? Thus far, we have only discussed the overall economic outlook and how that pertains to the telecom sector. Now, let's consider the technological changes that are taking place within telecom.
The market for current telecom technology (2G) is quite well saturated, and absent an economic stimulus, will likely see little growth in demand anytime soon. As such, many people have shifted their attention to the next generation of technological telecom toys, or 3G. It seems only fitting, then, that Japan, the most industrialized country plagued with what currently appears to be the weakest economy, would have a trial launch of 3G services.
Japan's telecom-giant, NTT DoCoMo (NTDMY) recently launched a trial 3G service, which, theoretically, includes such services as videoconferencing and fast Internet access on mobile phones. Reportedly, there are several wrinkles that still need to be ironed out. Apparently, there were reported software glitches, which delayed the planned release of handsets with video cameras. Also, there are some battery and speed bugs that need to be cleaned up. While it is very unlikely that anybody was really expecting a commercial launch of 3G services any time soon, the recent spate of glitches simply shows that much work still has to take place to fine tune this generation of services.
The telecom sector continues to flounder amid easing economic conditions in the U.S. and abroad. And the latest test launch results suggest that it is still going to be a while before 3G services are completely up and running, with fully operational handsets in the hands of consumers.
All hope is not lost, though. The major central banks around the world have done a good job in cutting short-term interest rates, in an effort to stimulate economic growth later this year. Even the European Central Bank, which has been stuck in the tight position of being faced with slowing economic activity and inflation, has cut rates.
Meanwhile, based on deterioration in the labor markets, protracted weakness in the manufacturing sector, and general overall economic easing, it is not out of the realm of possibility that the Federal Reserve will cut interest rates at its next monetary policy meeting in late June. The Fed cut rates aggressively earlier this year, and the economy should start to benefit from this action in another couple of months.
In short, the outlook for the economy in general, and telecom in particular, remains somewhat dark in the near term. Things start to look much brighter, though, as the year draws to a close, as the Fed's interest-rate cuts and the proposed tax cut help to reinvigorate the economy. These factors should also help the U.S. economy grow at a solid, sustainable rate next year, which paints a rather positive picture for the telecom sector. |
