To: Suresh who wrote (35262 ) 11/27/2001 2:37:39 AM From: Johnny Canuck Read Replies (1) | Respond to WHY THIS RECESSION WILL BE WORSE. While spending on hardware dropped at an annual rate of 31 percent in the first half of this year, software fell just 5 percent. Indeed, software remains one of the few sectors that venture capitalists are still funding. But there's reason to suspect we're on the verge of a software collapse as well. As Stephen Roach, chief economist for Morgan Stanley Dean Witter, points out, companies spent $1.40 on software for every dollar they spent on hardware between 1990 and 1997. That figure rose to $1.70 between 1998 and 2000, largely due to the rise of Internet-related business. But because hardware spending has been falling at a much faster rate than software spending, the ratio had risen to $2.09 by the middle of this year. There's no way that kind of ratio can be sustained: Businesses only need so much software to run a fixed amount of hardware. At its peak in 2000, capital spending accounted for only 14 percent of corporate costs, meaning there was only so much cost-saving that restraining investment could yield. Much more daunting was the 70 percent of corporate costs accounted for by labor. In fact, as Roach has noted, the glut of capital equipment that firms accumulated in the late '90s was surpassed only by the glut of personnel they hired, again in anticipation of demand that was still years away. Much of that personnel glut came in the form of managers. By 2000 the size of the nation's managerial class had risen to nearly 20 million, up more than 20 percent since 1994. Which meant that, to really cut costs, companies would have to cut high-paying jobs. And, over the last few months, they've done exactly that. From October 2000 to February 2001, managers accounted for less than 2 percent of the 400,000 Americans who lost their jobs. Between March and June, they accounted for a whopping 64 percent of 486,000. And though the subsequent spike in layoffs is typically blamed on the terrorist attacks, its impetus clearly predates September 11. In fact, according to The New York Times, many firms actually delayed and even moderated their layoffs in the weeks following the attacks for fear of appearing callous. Capacity in the three tech sectors more than doubled between 1998 and 2000; the movie industry added 2,200 more screens even as admissions fell 4 percent. It's not hard to see why. First, money injected into the financial system inevitably gets used. When Greenspan's fear about financial crisis proved overblown, that use turned out to be investments that "were not justified by fundamentals, and not socially or privately productive," according to Ohio State University economist Steve Cecchetti. tnr.com
