Paging Dr. Greenspan...
By Michael Wallace
The old truism goes "when the U.S. sneezes the world catches a cold." But what happens when the U.S. catches a cold? Global pneumonia? To look at the tech sector, the patient is deteriorating and the attending physician, Dr. Greenspan, is still treating the symptoms without prescribing a cure.
Omens are far from encouraging, with the strong dollar, the implosion of business capital spending, and plunge in commodity prices arguing strenuously against a "V-shaped" recovery in U.S. and world growth.
From software to switches, tech companies have been collectively voicing anguish over a lack of earnings "visability" through year-end. With an alarming number of once-solid tech companies trading 80-90% below year-ago peaks, the rolling capitulation left few unscathed. Eradication of a generation of dot.com firms has reduced the competitive incentive of mainstream corporations to dramatically alter their business model at a time of a global demand slump. Patience and procrastination have become virtues, as Greenspan's productivity-led boom is rapidly dismembered.
The Fed Chairman in his most recent, but largely overlooked, speech on "the challenge of measuring and modeling a dynamic economy" appeared optimistic about the Fed's efforts to quantify changes wrought by the new economy. He seemed to go to extra lengths to get into the nitty gritty of measuring pricing and output of high-tech gear to demonstrate the relevance of Fed research and U.S. data, and indirectly dismiss mounting criticism that the Fed data is out of date.
Yet when the Fed began the last tightening cycle, Sun Microsystems CEO Scott McNealy begged it to not choke off innovation. And recently Cisco's CEO Chambers bitterly said U.S. data was stale compared to his own real-time systems. Greenspan seemed to respond ironically that some day high-tech information systems might allow public statisticians to measure the sector "close to real time."
Moreover, in a case of reverse contagion, Cisco, Ariba and others have been warning of a sharp drop in capital spending in Europe and Asia following the U.S. tech boycott. Indeed, Greenspan will have another opportunity to underscore the Fed's role as the world's lender of last resort at Wednesday's testimony on trade policy before the Senate Finance Committee at 10 EDT, though whether he seizes it remains to be proven.
Like U.S. consumers and employment, the trade-weighted dollar has remained surprisingly out of synch near 15-year highs of 119 given the carnage on Wall Street and decimation of business sentiment. Just how much longer the strong dollar can tempt fate is questionable, as the index tests back below 116.
The firm dollar squeezes foreign-based revenues of U.S. multinationals, especially in the tech infrastructure business and S&P equity research sees negative year-over-year profits for S&P 500 firms of -14% for the first quarter and -8% for the second. New lows in the JOC commodity index also imply deteriorating pricing power. The NAPM prices-paid component suggests the same, after it fell below the 50% boom/bust line in March.
Eventually the profit recession will force consumption and jobs to follow suit. A fresh reminder will come Friday with March payrolls, which S&P MMS expects to gain 90,000 and the unemployment rate to back-up to 4.3%. That would look rosy compared to mounting corporate distress, and the May 15 FOMC seems a long way away if the Fed chooses to wait for the real economy to register unambiguous shift to a broader downturn.
Wallace is a Senior Economist for Standard & Poor's