| BUSINESSWEEK ONLINE : MAY 3, 1999 ISSUE | ||||||||
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| COVER STORY
Commentary: Consider This: A Tech Slump May Spark a Hard Landing With technology issues reaching nosebleed levels, many market watchers heaved a sigh of relief when they saw recent signs of life in other sectors. Expanding the bull market into other, long-neglected realms--including such cyclical issues as Caterpillar (CAT)--seemed to be only good news for investors. But for better or worse, the fate of the bull market is tied to the performance of the tech sector. High-tech spending by businesses and consumers is the irreplaceable driving force behind today's economic and stock market booms. Like autos in the 1920s and railroads in the 1890s, a new technology--in this case, computers and the Internet--provides a source of demand strong enough to power a whole economy. Companies are willing to keep investing in information technology--despite turmoil abroad, low capacity utilization in traditional manufacturing, and weak profits. EXCELLENT PROGNOSIS. What's more, the jobs and profits created in high tech are fueling consumer spending. The tech-driven boom in stocks has given consumers plenty of cash. Moreover, by BUSINESS WEEK's calculations, average real weekly wages for production and nonsupervisory workers in high-tech and financial services rose by 2.9% in 1998. In the rest of the private sector, real weekly wages rose by only 0.9%. If growth in technology spending were to turn sluggish from its double-digit pace of recent years, other sectors of the economy, such as consumer goods manufacturing, will likely not be able to take up the slack in investment spending and in income growth. No doubt a sharp slowdown in technology growth could lead to a far harder landing for the economy than people are currently expecting. To be sure, there is no solid evidence yet that the technology boom is over. Despite the troubles at Compaq Computer Corp. (CPQ), companies such as Microsoft (MSFT) and EMC (EMC) are still reporting strong profit and revenue growth. And the long-term prognosis for the economy appears excellent, as the twin engines of technology and globalization bring productivity gains and faster growth. However, if those growth machines were to sputter, non-tech companies would be hard-pressed to generate the sort of growth that established tech companies have been showing. Not only are businesses such as autos and food in more mature, slower-growth sectors, but also their earnings potential is limited by the fragile state of the global economy. The International Monetary Fund just lowered its growth estimate for the world economy outside of the U.S., dropping its forecasts for Europe, Japan, and Latin America. A tech slowdown would have other far-reaching effects. For one, tech companies have been contributing an outsized share of productivity gains. Over the last five years, output per worker in manufacturing has risen at a solid 4.8% pace, as measured by the Federal Reserve's industrial production index. But take out computers, semiconductors, and communications equipment, and productivity growth in manufacturing falls to only 2.2%. Not bad, but not enough to sustain a boom. In addition, while old-line companies can boost productivity, they're struggling to grow much faster than the overall economy. Without rising revenues, it's tough to boost wages and create jobs. For example, in the midst of soaring auto sales, jobs in the auto industry have fallen, while real weekly wages have declined by almost 5%. The problem is that both the economy and the market are addicted to the exhilarating tonic of the tech boom. Without it, both could be in for a hard landing. At least one historical precedent is rather sobering. The boom of the 1920s was mostly driven by the tremendous expansion of the auto industry. When auto sales peaked in early 1929 and auto stocks softened, the rest of the market continued rising for another six months. But with the main driving force removed, it was only a matter of time before the market plunged earthward. Of course, nobody expects the Federal Reserve to allow even a deep market crash to turn into another Depression. But it would be a mistake to discount the dangers. This has been a tech-driven boom--and if and when the tech cycle turns down, it could well take the markets and the economy down with it. By Michael Mandel _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 A Wiser Bull? COVER IMAGE: A Wiser Bull? TABLE: The Market Turns From Glamour To Grit CHART: Cyclicals Trump the S&P 500...Industry Comes Back...As Do Financials and Small Caps The Highfliers: From Vertigo to ``Only Very Volatile'' CHART: The Wild Ride for Net Stocks Commentary: Consider This: A Tech Slump May Spark a Hard Landing Boeing Breathes Easier TABLE: Forecast for Boeing: Partly Sunny TABLE: Profit Woes? Not This Time ONLINE ORIGINAL: How a Market Shift Could Realign the Mutual-Fund Stars INTERACT E-Mail to Business Week Online | |||
