Tech staggers, recovery waits

When the economy started to turn soft, manufacturing companies started to reexamine their spending plans.

Would they really need that new computer system? How about those new cellphones for the marketing folks? And did headquarters really have to have all those satellite dishes and fiber-optic cables?

As companies from Intel to AT&T have found out, the answer turned out to be a thrifty and resounding "no."

Their decision, multiplied by thousands of businesses, partially explains why the high-tech industry remains mired in the dumps - and, as a result, much of the rest of the US economy along with it.

Indeed, one of the biggest reasons behind the nation's lingering stagnation - despite six interest-rate cuts this year by the Federal Reserve - is the continued recession in the technology sector, the driving force behind much of the economic boom of the 1990s.

The depth of the industry's woes was painfully evident again yesterday: Lucent Technologies announced it would lay off another 20,000 workers. When combined with earlier job cuts, that means the company will have let go almost one-third of its workforce in about a year.

Other recent high-tech layoffs range from big names such as Compaq Computer (8,500 jobs) and 3-Com (4,200) to smaller dotcom companies like Exodus Communications (675) and WebMD (350).

Economists don't expect to see much improvement anytime soon. The industry is beset with oversupply and overcapacity. Too many companies have been laying elephant-trunk cables down city streets in the expectation that hordes of new homes and business would "wire" themselves for the new economy.

Cellular phone companies, with competing technologies, continue to offer service at cut-rate prices to attract customers. And chip manufacturers are still waiting for consumers to spend money on the latest computers. "Basically, everyone is fighting to build the junk," says David Wyss, an economist with Standard & Poor's DRI in New York.

Mr. Wyss estimates the problems in high technology are taking about one full percentage point of growth off the nation's gross domestic product.

The earliest that economists now expect to see any improvement is sometime next year. For that to happen, business conditions must stabilize - something the Fed has been trying to do with interest-rate cuts all year.

"Companies will have to make more rational decisions," says Richard Rippe, an economist with Prudential Securities in New York. He expects to see some business spending return in 2002, but adds: "We're not going back to boom conditions."

Hardest hit sector

The worst hit of the high-tech sector is telecommunications. There had been, for instance, high hopes for broadband communications. Over the past three years, manufacturers of fiber-optic wire - the backbone of the telecommunications revolution - have found ways to squeeze far more data onto a single line. But that has left many fiber-optic companies, which sank too much of the glass-based wire into theground, holding excess capacity that's not being used.

"There's probably a lot of glass in the ground that will probably never get lit," says Tyler Gronbach, spokesman for Qwest Communications in Denver, which reported yesterday a $3.3 billion net loss. But "we're seeing tremendous demand for it from customers."

The company has seen the number of its high-speed Internet subscribers double in the past year and nearly double again by the end of this year. But that still only accounts for some 500,000 subscribers, Mr. Gronbach says, compared with its capacity to serve 6 million.

The question is: How quickly will that extra capacity get bought up? Some analysts expect it will take years, which has made investors leery of pumping money into the industry. Others, however, point out that the high-tech sector is notoriously volatile and can quickly use up capacity as new demand arrives.

The cellphone industry reflects a similar tale of woe. Companies built far more capacity than there was demand. As a result, firms such as Motorola and Nortel have been steadily laying off employees. According to Challenger, Gray & Christmas, a Chicago outplacement firm, the telecommunications industry has led all sectors in job cuts since April. In June, it shed 27,446 jobs, including 4,000 at Motorola.

Price-cutting is helping some segments of the computer industry. Wyss expects that the tax rebates, which started to hit the mail this week, may be used to buy computers that have been collecting dust.

"Prices are so darn cheap," he says, adding, "It's hard to spend your entire rebate on your computer."

Don't look for quick revival

The downturn in the technology sector was perhaps predictable. When the economy starts to slow, capital spending on things like laptops and Internet servers are among the first to be dropped. "It's going to be slow coming back," says Rick Sherlund, a technology analyst at Goldman Sachs Inc. "Just because the economy improves a little, that doesn't mean companies will start spending wildly again."

Laurent Belsie in St. Louis and Amanda Paulson in Boston contributed to this report.

(c) Copyright 2001. The Christian Science Monitor