Techs Soft Landing In Rough Economy - Page 2

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Payback Time?

The economic numbers coming in paint a mixed picture at best. The National Association of Purchasing Management reported last week that U.S. manufacturing activity fell in December to its lowest point in 10 years. It was the fourth monthly decline in a row, and steeper than economists had predicted. The Department of Commerce contributed to the chill on Dec. 21 when it said Gross Domestic Product (GDP) in the third quarter fell to 2.2 percent — the slowest rate of growth in four years. The DOC had revised its estimate at the end of November for the third quarter downward to 2.4 percent from 2.7 percent, but the actual numbers came in lower than the revised estimate. And claims for unemployment took another jump in November, reaching their highest level in four years.

The news isnt all bad, though, and this is why very few economists have been willing to say the economy is headed for a recession. Housing starts were up in November; personal income rose slightly after a small dip in October; and the consumer price index rose a modest 0.2 percent, keeping inflation in check.

More worrisome seems to be the steady barrage of layoff announcements coming out of the tech sector, debilitating energy prices and corporate profit warnings. Layoffs in the dot-com ranks have been particularly severe, with outplacement firm Challenger, Gray & Christmas reporting that job cuts rose another 19 percent from Nov. 27 to Dec. 26, hitting 10,459, compared with Novembers tally of 8,789. For the year, December 1999 to December 2000, the firm counted 41,515 job cuts in the tech sector — almost half of which came from Net companies.

"In the first six months [of 2000], all you heard about were job fairs, lavish recruiting parties and after-hours mixers where would-be entrepreneurs hoped to meet free-spending venture capitalists," said Chief Executive John Challenger. "Now, pink slip parties are the rage, where newly jobless dot-com workers commiserate, exchange résumés and talk about the good ol days — which of course were only six months ago."

The stock markets have been kept reeling by a succession of warnings of lower earnings. In recent weeks, the Nasdaq has been rocked by negative news from such bellwether stocks as Compaq Computer, Dell Computer, Gateway, Hewlett-Packard, Network Associates Inc. and even Old Faithful, Microsoft. One of the most eye-catching was a warning on Dec. 5, 2000, by Apple Computer that $600 million worth of revenue had been wiped from its projections. "It looks like were facing a broad economic slowdown that will affect many segments," Apple CEO Steve Jobs concluded at the time.

But once again, even though the warnings from PC makers appear to point to a broad decline, analysts said its not a straightforward conclusion. PC sales look "disastrous" in the U.S. in the fourth quarter, but growth in the corporate sector and in international markets remains healthy, said Roger Kay, a researcher at International Data Corp. IDC lowered its estimate for U.S. consumer PC sales in the fourth quarter from 21.2 percent year-over-year growth to 10.2 percent. However, it still expects a 19.6 percent gain in overall PC sales, thanks to a strong corporate and Asia-Pacific market. That figure is only slightly lower than IDCs original estimate.

"Home desktops are only a small piece of the market," Kay said. In contrast, corporate PC sales, which had been slow in the first part of the year, particularly as companies got through the last of their Y2K issues, began to pick up in the second half. Kay expects that momentum will increase through the first two quarters of this year as the upgrade to Windows 2000 finally kicks in.

Holiday e-commerce sales are another case of the glass being half full or half empty. Sales didnt meet the rose-colored forecasts of analysts earlier in the season, but they were still strong. According to a report by PC Data and The Goldman Sachs Group released just after Christmas, online holiday spending soared to $8.7 billion this year, a 108 percent increase over Christmas 1999. Yahoo! said order volume nearly doubled for its shopping properties, and sales for retailers that also operate brick-and-mortar stores, such as Macys and Eddie Bauer, came close to tripling.

On the other hand, several Internet-only retailers, such as eToys, warned that their revenue was not likely to meet expectations. EToys said it could run out of cash as early as March, increasing the prospect that there will be more layoffs and more failures in the dot-com sector in the weeks ahead.