US economy recovers but does not sizzle
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onstituting 70 per cent of India's IT exports, US economic parameters are extremely crucial to Indian industry's growth projections and guidance. Latest reports from the US suggest that the economy is snapping back from last year's recession. Recording its strongest performance since 2000, the latest reading on the first-quarter gross domestic product -- which measures the total output of goods and services produced within the United States -- shows the economy grew at a rate of 5.6 per cent. Although lower than the expected growth rate of 5.8 per cent, the first-quarter performance signals the beginning of a turnaround given the economy actually shrank at 1.3 percent rate in the third quarter of 2001 and GDP grew at a below-par 1.7 per cent rate in the fourth quarter.
Before Indian IT celebrates, one needs to read between the lines. The key drivers of the turnaround were President Bush's $1.35 trillion tax cut package and a whopping 18.3 per cent growth rate in federal government spending on national defence, the biggest increase since the first quarter of 1967. Capital spending vital to sustained economic growth registered a steep drop for five straight quarters. Businesses cut spending by 8.2 per cent rate, 2.5 points deeper than the 5.7 per cent decline previously estimated. US unemployment rates continue to be at an eight year high of 6 per cent. Not surprisingly despite first signs of an economic rebound, US economists have mixed thoughts on how the recovery will shape up with predictions ranging from sluggish to solid. John Forelli, senior vice president at Independence Investment LLC, which oversees $20 billion rightly, described the mood. The mood is cautious, it's sort of directionless." "People realise the economy is slowly improving, but not enough to make people raise estimates and so forth. It sort of feels like you have to wait until the third quarter to see directional changes in expectations."
That the economy is not sizzling was reflected in a series of recent announcements by IT majors. In the last two weeks IBM, whose profits fell by 30 per cent in April, and Ericcson, whose orders fell 16 per cent last year, with a 39 per cent drop in the fourth quarter, announced 9,500 and 17,000 job cuts respectively. IBM CEO Sam Palmisano, in a recent address to employees warned: "It's clear that the industry is not bouncing back this year" and that "it's not going back to (growth rates of) high single digits or teens." Looking out further, Palmisano said, "It's not going to be growing at 10 or 11 per cent next year either." HP Chief Executive Carly Fiorina echoed Palmasino's weak outlook. In a statement, soon after company's results Fiorina said: "While a muted recovery in the second half is still possible, we are not counting on meaningful improvement in IT spending until 2003. 'Muted' meant a 2 per cent rise in IT spending." Fiorina however saw 2003 recovery at 8-10 per cent. Computer maker Sun Microsystems has also warned that that corporate technology spending was still constrained and that order flow was not as smooth as in the March quarter.
Weak corporate spending on technology has also hurt most hardware companies for the past year. Semiconductor sales for instance were hit 32 per cent in 2001. Network gear makers are in store for more hard times as the much-needed sales boost in the June quarter is unlikely, as corporations remain cash-strapped, according to a report by Pacific Growth Equities.
Unless capital spends improve and economic recovery is assured and back on a firm-footing, hiring will remain slow. For now, it can be safely predicted that's at least two quarters away.
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