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Wednesday, April 25, 2001

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Silver lining peeps

Krishnan Thiagarajan

N.Nagaraj

THE prospect of a recession is looming over the US, the cancellation of orders and slowing order book position is expected to take a heavy toll on the earnings performance of corporate majors in the coming quarters. Although the incipient signs of a slow down were evident even in October/November 2000, the full impact and severity of the crisis became visible only towards the middle and end of March this year.

In a way, the marked US slowdown is the culmination of the profit warnings/slowing order book for sectors ranging from PCs, semiconductors, wireless, telecom equipment manufacturers/carriers, optical networking equipment and select software/Internet cons ulting companies. And this litany of woes has spanned companies ranging from Dell, Intel and Microsoft in the PC and semiconductor segment, AT&T, WorldCom, Nortel, Cisco, Motorola and Lucent among telecom carriers/infrastructure vendors to Oracle, Ariba, i2 Technologies, Broadvision and Computer Sciences Corporation among software/Internet companies over the past six months.

To make matters worse, the slowdown virus is spreading to parts of Europe. Largely, because key infrastructure vendors such as Ericsson, Nokia and Alcatel were caught on the wrong foot, as they were unprepared for the sharp decline in cellular handset sa les in the US. Moreover, future growth opportunities continue to remain uncertain for these players as investments in key technologies such as 3G (third generation wireless systems) have been progressing at a snail's pace.

The current slowdown in the US has raised a simple and relevant question -- Will the spending on information technology (IT) products and services suffer a massive slowdown in the US and spread to other parts of the globe? A recent report by IDC, a leadi ng provider of technology intelligence, industry analysis and market studies, states that the slowing US economy is affecting the growth of worldwide spending on technology and services.

According to them, the growth in IT spending in the US of 11 per cent in 2000 is forecast to fall to 7 per cent in 2001. Despite this fall, IDC has forecast that global IT spending will remain healthy, growing by 9 per cent in 2001. To sustain these grow th levels, the strongest growth opportunities in IT are expected to come from emerging markets throughout Eastern Europe, Asia, West Asia and Africa.

Despite the overall gloomy scenario, there are two encouraging developments for the IT industry:

Strong demand for IT professionals: According to a study conducted by The Information Technology Association of America (ITAA) in April 2001, demand for new talent in the IT industry continues to remain strong. The key findings of this study are:

Over 10.4 million people in the US are IT workers. Information technology remains at the forefront of the US economy, directly accounting for approximately 7 per cent of the nation's workforce.

The demand for IT workers is substantial. Employers will attempt to fill over 9,00,000 new IT jobs in 2001. Demand for IT workers is down 44 per cent from 2000, attributable to the slowdown in the high tech sector.

The talent gap for IT workers remains large, although substantially less than 2000. Hiring managers report an anticipated shortfall of 4,25,000 IT workers to fill their openings. However, last year, ITAA found a shortage of approximately 8,50,000 workers -- or twice the current total.

Rising labour productivity: According to ``Technology Barometer,'' a quarterly brought out by PricewaterhouseCoopers focussed on the rapidly growing technology businesses of all sizes, the net productivity gain for the year 2000 from these businesses ave raged 11.2 per cent.

The productivity gains for large enterprises were 10.9 per cent vis-a-vis 11.4 per cent for small enterprises. In addition, PwC has projected a 13.6 per cent productivity increase in 2001, with large businesses likely to post a 12 per cent gain and small businesses, 15.2 per cent. Clearly, the two and half percentage point gain in labour productivity (or revenue-per-employee) augurs well for the near term growth of the technology sector.

Dwelling on the same topic of productivity growth, Alan Greenspan, Chairman of the US Federal Reserve, recently said that, ``if productivity growth remains strong and demand recovers, `excess inventories' will be eliminated.....Corporate profit projectio ns for the long term remain elevated and that bodes well for productivity growth. Prospects for high productivity should, with time, bolster both consumption and investment demand.''

However, The Economist of London, has struck a note of caution. Commenting on whether the US is heading towards a recession, it has stated that the current slowdown is following a peculiar business cycle. It has pronounced the view that in the current bu siness climate, the orthodox business cycle remedies, of the kind which can be corrected through interest-rate cuts (as put through by Greenspan) may not be effective. The Economist is of the view that this recession may have been triggered by overinvest ment, led by a splurge in personal and corporate debt. If ``overinvestment'' is the root cause for all the troubles ailing the US economy, it is likely that capital spending (including IT spending) in the US could take a big hit. And if that happens, the US economy may slip into a recession.

In this backdrop of divergent viewpoints, how the whole US economy shapes up in the coming months remains a million dollar question. But either way, the US economy holds the key to the future course of the global economy.

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