A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



1990s excess still hurts

By numbers alone, the valley's economy appears to be right where it was in 1999. After the hysteria of the Internet boom, the number of jobs in the valley is back to 1999 levels; sales by Silicon Valley's biggest companies are back where they were three years ago.

But other numbers tell a more complicated story. While the valley's economy is back to pre-boom levels, it is likely to take longer to fully recover because of the dramatic overexpansion during the glory days.

"A boom-bust is highly destructive," said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, a research firm specializing in business cycles. "In the boom, you make mistakes putting resources into things you don't need and in the bust you pay for it in an inefficient way."

And Silicon Valley is still paying for its late-1990s boom:

Seven of 10 public companies are still losing money. During the past three weeks, two-thirds of the local public companies have announced their third-quarter results. The results: 151 companies reported losses, while only 70 companies made money.

Some of those losses are one-time events to pay for past excesses. But in the long run, companies that don't make a profit don't last.

Silicon Valley companies are facing their own version of the game "Survivor,'' says Donald Luskin, chief investment officer at independent research firm Trend Macrolytics in Menlo Park. His analysis shows that 70 percent of nearly 1,600 tech companies are losing money from operations, and many of these won't survive one more year.

"It's now a game of life and death in tech land," he concluded.

Tech earnings also could be in trouble if companies are required to expense stock options. Investment adviser John Mauldin thinks tech companies could face "a glass ceiling" if accounting standards are changed because any improvement in profits would be erased by the impact of expensing options.

Office space remains overbuilt. About 42.3 million square feet of office space was up for lease in the Bay Area in the third quarter -- more than four times the amount in 2000, according to BT Commercial.

Mark McGranahan, senior director for Cushman & Wakefield, believes it will take five to six years to absorb the extra space. "The market is terrible, and tech companies are still shedding space," he says.

Too many tech companies are still chasing the same customers. Steven Milunovich, Merrill Lynch's technology strategist, estimates the number of tech companies needs to shrink by nearly 30 percent. It could be one to two years before the consolidation is over, he says.

Hiring hasn't started yet. Regional research firm projects that Santa Clara County is hitting bottom in terms of lost jobs. This winter, the layoffs should stop. Hiring should pick up next year.

But that will come too late for some of the 92,000 who have lost jobs since the labor market peaked two years ago.

Lance Drake, a 55-year-old computer programmer, was laid off 13 months ago after working at four start-ups, all of which left him with worthless stock options.

He has used up his savings looking for work and is now planning to move to Santa Fe, N.M.

"I've never not been able to get a job at some level," said Drake, who moved to Los Gatos in 1978 from South Carolina.

He estimates he has sent out more than 400 and never had a chance to find out if his age was subtly working against him because he rarely heard back from interviewers. And he isn't alone. Among his friends, one lost his house, and another couple were laid off at the same time.

"I don't see how people with a $600,000 house and a $5,000 monthly payment can survive," he says.

Any signs of improvement could hasten the repairs needed to the foundations of the tech economy.

On Thursday, the government's report on gross domestic product -- the total measure of U.S. goods and services -- showed growth was less than expected during the third quarter. Today, a poll is expected to show chief information officers aren't increasing their tech spending as much as expected. National jobless statistics also are expected today.

Next week, the Federal Reserve Board is expected to meet and possibly cut interest rates.

And the latest GDP figures on tech spending are seen as signs that the tech economy has begun to turn a corner, although slowly. "The information suggests it is a turn that is sustainable in the near term," said Achuthan. "We're bouncing off the bottom."