Techs Soft Landing In Rough Economy - Page 3

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When you add all the indicators up, what you get is a picture of an economy that still appears to be headed for modest growth. In fact, in its year-end survey of 34 leading economists, the Federal Reserve Bank of Philadelphia came to the conclusion that the economy is still expected to grow over the next two years, by 3.1 percent in 2001 and by 3.4 percent in 2002. Those forecasts are down considerably from the 5.2 percent growth rate in 2000, but 3.1 percent GDP growth is still considered healthy by most standards.

As indicated by Yales Sunder, the problem with the economy — and the technology industry in particular — is that it has been running along like a Ferrari, with no care for normal speed limits. Cruising at the posted limit now feels like heading in reverse.

On top of that, many Internet companies founded during the bubble were created on business models without clear paths to profitability. Like a pyramid scheme, the dot-coms were set up to come crashing down once normal rules of economics were applied to the sector, making a soft landing — at least on the dot-com front — a remote possibility. Also, industry stalwarts such as Cisco Systems, Dell, Intel and Nortel Networks achieved market caps that could be maintained only if revenue continued to grow at exponential rates — rates the current economic climate cannot sustain.

"Last year when I taught courses on financial analysis, I was getting looks from students like I was a dinosaur," Sunder said. "They were telling me the old economics dont apply anymore. Well guess what? The laws of gravity still do apply and were coming back down to Earth."

Those with a harsher perspective say the dot-coms not only deserved to crash, but the industry will be better off for it. "In the last five months, traditional companies have been excited to see the dot-coms getting their butts kicked," said Michael Erbschloe, vice president of research at consulting firm Computer Economics. Rather than fear these upstarts, as they may have a year ago, the so-called bricks-and-clicks are looking to learn from the dot-coms mistakes and take advantage of their tarnished records. "Theyre asking, How can we use the Web to drive traffic into stores, do some sales and build loyalty? I think theyre succeeding," he said.