Tech Clobbered as Consumers Cut Spending

More than half of chip sales now go for consumer products, so tight credit and the decline in confidence damage all of tech's supply chain

By Stacey Higginbotham

The last time technology investments took a hit, it was easy to look around at the old sock puppets and other ruins of the dot-com crash and blame the downturn on the rapid runup in venture-backed funding for me-too companies and unproven business models. But this time around, what will haunt technology companies isn't their wholehearted embrace of the Web—it's consumers' wholehearted embrace of credit. That's right, this tech downturn could be pinned in part on you and me.

Before you get all huffy about subprime lending and greedy bankers, consider this: In the past five years, consumers have taken on massive personal debt in the form of home equity loans and credit financing, which they've used to buy fancier cars, appliances, and gadgets. Tech companies have been the recipients of a lot of this spending, either directly—through the increase in sales of high-end gizmos such as cell phones—or indirectly, through the rise in such things as luxury automobiles that contain more semiconductors and displays. As a result, when consumers stop spending, tech companies will start hurting.

According to data from the Federal Reserve, consumer debt not associated with home equity lending has increased 23% since 2003, when people borrowed $2.1 trillion. As of August, Americans had $2.58 trillion in debt. But prior to last year, home equity lending fueled much of the extravagance. Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy have estimated that borrowing against home equity lines of credit freed up about $187 billion in cash per year from 2001 through 2005.

Consumers in a Darkening Mood

There are signs that the flow of credit is coming to an end. Plus, the index of consumer confidence, started in 1967, is at the lowest point in its 41-year history, meaning that even those who aren't seeking loans aren't hot to spend their hard-earned cash. Earlier this month, George Scalise, head of the Semiconductor Industry Assn., called for federal intervention in the financial markets. "With consumer purchases now driving more than half of semiconductor sales, consumer confidence is essential to the entire supply chain of the global technology sector," he said in a statement. As consumer spending—whether with cash or credit"slows over the coming quarters, technology companies that have seen their businesses become more dependent on consumers may have to do some of their own belt-tightening.

Hitwise, a research unit of the credit bureau Experian, released data Tuesday that show U.S. visits to online retail Web sites have declined for the eighth consecutive week. For the week ended Oct. 25, 2008, U.S. visits to the 500 retail Web sites declined 3% from a year earlier. The largest drops in visits were to online music and computer sites. That trend is going to cause problems that will end up affecting the entire tech value chain.