Tech Industry Battening Down the Hatches

[Brian.oco]

Even as U.S. Treasury Secretary Henry Paulson reassured us on Friday that the economy "would not go into recession" in 2008", some people, especially consumers, aren't buying it.

This is exactly what I'm talking about when I vent over the power of perception and the media's glee in talking down the economy by highlighting the negative and shielding the positive.

People are scared and I know why. No, it's not because they know someone who's going to lose their house to foreclosure - foreclosures represent less than half of one-percent of U.S. homeowners. And now banks, realizing they could be left holding the bag if a homeowner is foreclosed, are doing more to work with owners and try to keep them in their homes.

No, people are scared because the media has told them to be scared. It's a self-fulfilling prophecy and one that, despite the best efforts of the alarmist media, won't come true in a technical sense. As Paulson points out, GDP growth remains in positive territory, albeit at a slower growth rate. "And everyone knows you can't have a recession with positive growth, right,?" Paulsen told reporters yesterday.

But in a fundamental, emotional way, the media just about has its cherished recession. Consumers are snapping their wallets shut and businesses are holding off on expenditures.

The tech industry is feeling my pain. Just ask John Chambers, chairman and CEO of Cisco Systems. In a wide-ranging phone discussion with analysts and reporters, Chambers says the media is largely to blame for the lackluster spending environment facing the tech industry.

"I think we are actually talking ourselves into this [economic] slowdown," Chambers told analysts during a conference call held to discuss the company's fiscal 2008 second quarter results on Wednesday. "Over the last three or four months, I felt pretty good about business until I got on the treadmill--and then I quit early because of the pessimism that exists in the market."

Chambers says that analysts, commentators and network news presenters are literally pounding the global economy into the ground by overstressing negative business developments and not emphasizing enough the obvious signs of strength that corporate executives are seeing in their operations, according to the executives.

His tech brethren agree with that assessment. "I have the same caution that I think everybody in America who watches CNBC has today," said Paul Otellini, president and CEO of Intel Corp. last Jan. 15 while presenting Intel's fourth quarter results to investors.
"You hear all of the pundits saying that the world is going to go to a trash basket and you worry," Otellini said. "It may be a self-fulfilling prophecy."

Like Chambers, Intel's Otellini hasn't seen "anything on the horizon" that would justify such pessimism. In fact, "our customers don't see anything on the horizon," he said.

Both Intel and Cisco have seen their stock prices drop in recent weeks, as bad news from the retail sector sours company sales.

Cisco's incoming CFO says the company's revenue growth would slow in the current quarter to 10 percent, down from the traditional 12 to 17 percent rate. A big problem now is business spending, where the word "caution" crops like crabgrass in June.

"It's probably as cautious as I've seen CEOs in the United States and Europe in many years, and it isn't that they've changed budgets dramatically," Chambers said. "Our customers in many of the emerging countries, especially in India, China and the Middle East, remain optimistic about their business momentum."

Sure, because the media in Asia and the Middle East aren't moronic enough to close their eyes, tap their toes, and wish that we're not in a bullish economy any more.

Wish I could say the same for the U.S.

[jwenting]

The problem with politicians telling us there won't be a recession is that noone believes them anymore after they've lied to us for decades about pretty much everything (and especially economics).

That's the real problem, the very fact that a politician tells you something makes you suspicious about the truth behind the statement, UNLESS he's telling you that you're going to be worse off because of new tax hikes (and even then you are suspicious about the amount he tells you you're going to loose, mentally doubling it).

Will there be a recession? Possibly, even probably.
Is there a macroeconomic reason for there to be one? Probably not.

So both the consumer who fears a recession and the economist telling you that there is no reason for a recession are correct.
But that recession won't happen because of macroeconomic reasons, it will happen because consumers perceive there to be a recession and therefore stop buying things, thus bringing about that recession all by themselves.

The tax increases in some countries which are leading to actual loss of consumer buying power in a strengthening economy only make things worse, especially when those consumers see their politicians wasting that money on projects that don't do them any good (especially pay increases for those politicians themselves, reducing the opinion people have of those politicians even further).

And there's the problem. While the economy is strong and getting stronger (for the moment), consumers have less money to spend in real terms because of outside influences (like tax increases) and are faced with ever strengthening inflation (because of tax increases and increases in trade tarriffs), which reduces their buying power from both sides at the same time.
The result is stores and other companies which see stronger sales income while at the same time seeing reduced sales in product volume as well as no or very limited increase in post tax revenue.
As this percolates up the economy, pretty soon B2B deals will also start to suffer as client businesses have less money to spend on services and goods.

Many service companies are in fact already seeing (potential) customers getting harder to convince to part with their money, and are seeing a decline in profit margins because they have to lower prices to sell anything at all.

By telling people there's nothing to worry about politicians are only making things worse (see the beginning, people automatically in their minds reverse any positive message politicians give them about the economy).