Market meltdown likely to hit tech spending

Market meltdown likely to hit tech spending

Summary: Are chief financial officers, the folks who control IT budgets, really going to be enthusiastic about spending on tech projects amid market volatility?

SHARE:

When the stock market tanks in a short period of time, technology spending often goes with it.

Simply put, there will be a round of downward revisions for technology spending in the next few weeks barring some miraculous rebound in the economy. Is it too early to call a soft patch for technology? Not really.

For starters, technology spending often tracks gross domestic product and economists are already scurrying to cut their second half forecasts. Meanwhile, other reports indicate that inventory levels in the tech supply chain are creeping higher. And the final reason why tech spending can be expected to take its lumps: Psychology.

I've lived through enough business technology cycles to know that companies instinctively pull back their capital spending amid uncertainty. These stock charts of the Dow Jones Industrial Average and S&P 500 scream uncertainty. Here's the cycle:

  • Market tanks.
  • Shares of companies follow.
  • Companies get cautious.
  • Spending and investment slows.
  • Economy pulls back.
  • Cycle repeats.

In this environment some technology projects---new data centers, cloud computing, software as a service and automation---make the cut. Other technology efforts such as PC upgrades may not.

Now the latest round of tech earnings highlighted how enterprise spending continued to chug along. Consumers were a bit flighty, but businesses were investing in technology. However, Juniper Networks recently noted that it was seeing a few economic hiccups. Cisco has been seeing warning signs amid its own execution issues. And Forrester Research was ready to cut its IT spending forecast based on debt ceiling talks. The U.S. raised its debt ceiling, but Standard & Poor’s downgraded the country's rating. That move is a first and while the merits of the downgrade are debated, the fact that the U.S. balance sheet is a mess isn't.

Also: Forrester: U.S. debt ceiling showdown will affect IT spending

What's a chief financial officer to do amid this mess? Pull back on spending---big time. Given that the CFO controls the technology budget it's just a matter of time before IT spending take a hit.

In addition, the tech supply chain may already be wrestling with inventory issues. Mirae Asset, a Hong Kong research firm, said the technology industry is facing an inventory glut amid weak demand. In a research report, Mirae said:

Prior to this study, we thought inventory issues in the tech supply chain were limited to upstream semiconductor companies, mainly triggered by the earthquake in Japan in March. Companies ordered more than they needed because concerns on component shortages. Our study indicated that downstream companies (including EMS companies, distributors/retailers and handset makers) too hold inventory levels similar to the previous financial crisis during 4Q08 and 1Q09. We attribute this to the end-market slowdown over the last 2-3 months.

Indeed, Mirae has a table that highlights days of inventory across various supply chain players. Here's a sample.

  • Qualcomm had 50.9 days of inventory in the second quarter, the highest since the first quarter of 2009.
  • AU Optronics, which makes LCD panels, had 45.9 days of inventory in the second quarter, up from 43.3 days in the first quarter. Those tallies are the highest since the third quarter of 2008. LG Display has a similar situation.
  • Contract equipment manufacturers---Flextronics, Sanmina-SCI, Jabil and others all have high inventory levels.
  • Retailers and distributors---Ingram Micro, Tech Data and Best Buy all have inventory levels that are lofty.
  • On the handset side of the equation, Nokia, RIM and Motorola are at inventory levels dating back to the fourth quarter of 2008 and first quarter of 2009.

Add it up and the tech sector appears to be destined for rough sledding.

Related:

Topics: Enterprise Software, Banking, Software

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

28 comments
Log in or register to join the discussion
  • Thanks Larry for making my day!

    nt
    Dietrich T. Schmitz, Your Linux Advocate!
    • RE: Market meltdown likely to hit tech spending

      @Dietrich T. Schmitz, Your Linux Advocate! Congratulations! Finally even the tea party apologist figured it out.
      pupkin_z
      • RE: Market meltdown likely to hit tech spending

        @pupkin_z - I am no member of the tea party, but I read a post he wrote this morning (including rescinding NAFTA and other things that have hurt America). I am in full agreement with him.
        HypnoToad72
      • How is the tea party involved in this discussion or in the budget deal

        last week?

        Be careful what you think you know.

        BTW, I'll come straight out and say that I'm a "tea party" proponent (notice I didn't say I'm a member; there's no membership because there is no official tea party).
        adornoe
  • RE: Market meltdown likely to hit tech spending

    It's likely that capital spending will decrease but you can't just look at "inventory". There are different types of inventory as stated in this article about Corning Inc.:
    http://www.fool.com/investing/general/2011/08/04/why-corning-may-be-about-to-take-off.aspx
    reverseswing
  • Only spending that automates tasks or reduces staff

    If anybody cares to think about economics, when people have less money, less gets spent, layoffs occur because profits aren't being made because nobody spends... the downward spiral continues.

    Never mind other factors, which compound the problem, but this isn't a political web forum. Pity.
    HypnoToad72
  • RE: Market meltdown likely to hit tech spending

    @HypnoToad72 - NAFTA isn't the problem. It's the politicians that shipped your manufacturing offshore. You should be vilifying those donkies, not shooting yourself in the foot.
    hunter003@...
    • RE: Market meltdown likely to hit tech spending

      @hunter003@... correct you are
      Aztec
    • Finally! Somebody that has it correct!

      Corporations didn't ship jobs or facilities overseas; government policy did, and of course, government policies are set by politicians.
      adornoe
  • The borrowing had to stop

    I don't totally disagree with the Tea party, I believe that running the country beyond it's means by using credit is an awful idea, but they should have raised taxes to make up the difference. Once the public had to taste the bitter pill of the true price tag of their social programs I think that both conservative and liberal groups would have cut spending more aggressively.
    balsover
    • RE: Market meltdown likely to hit tech spending

      @balsover, ahmen to the comment that when the true cost of a program is felt, we willl be less likely to spend capriciously.
      gil@...
    • Partly right on your post...

      Spending that is out-of-control is the major problem.

      However, raising taxes would have made the problems a lot bigger.

      Raising taxes is the opposite of what needs to be done, and what needs to be done is to lower taxes.

      Corporations with more money to invest, via less taxes, will grow the economy and create jobs. Taking money from corporations will make corporations pull back from investing or growing their business, and oftentimes, will have to lay off people to pay for those higher taxes. With more people ending up laid off because of higher taxes, the government will end up with less tax revenue. So, instead of gaining tax revenue, the government would actually end up with less.

      In the least, many of those corporations would have to outsource many of their operations and jobs to overseas markets, and the problem would end up growing even larger. Furthermore, with increased taxes, corporations would just pass on the higher taxes to consumers, by way of higher prices for their products and services. Then, we'd end up with a much larger problem, where people would stop spending as much because of the increased price for products and services from those corporations that had their taxes raised.

      Doing the opposite of what you suggested would be a much smarter and prudent thing to do.
      adornoe
      • RE: Market meltdown likely to hit tech spending

        @adornoe@...
        Keynesian economics teaches that government should pay down debt during good times and borrow if necessary during bad times. In a household this would be considered common sense. However, the U.S. government and probably majority households do not follow this simple rule...
        prof123
      • RE: Market meltdown likely to hit tech spending

        @adornoe@...
        Partly right... It depends on what taxes you are talking about. I agree raising taxes on corporations is not good. However raising taxes on people that make $250,000+ is not such a bad idea as Obama proposed. Basically the millionaires and billionaires of the US pay a little more. Perhaps then tax cuts to the middle and lower class would be possible down the road. The middle class fuels the economy. If something isn't done soon the middle class will disappear. It will be the rich or the poor. There are plenty examples of this in other countries. I think we can all agree we wouldn't want that!
        Steel73
      • prof123: Keynesian economis works in theory, but not in practicality.

        Government should not be in the spending business. Government should be in the business of providing the services which it can provide better than the private sector, like defense and road building.

        Spending "our" money with re-distribution schemes is self-defeating, because government does not know better than the people where and how to spend the money.

        Keynesian economics needs government spending, and government spending is counterproductive, because, it needs for the government to take the people's money and the economy's money, for government to "re-distribute" the way the bureaucrats decide, and oftentimes, the bureaucrats are politicians who have their own agenda to fulfill with wasteful spending. But the most negative part of government spending is having that money leave the "pockets" of businesses and people. Economic growth and jobs come from the private sector, and anything that is taken from it, means that the economy will have less to spend on growth and on jobs, which then makes government spending counterproductive. It's simple logic which Keynesian economics cannot negate.

        Government is there to work for the people, and not take from the people. Government should not be borrowing and should be living within it's means, and that means, whatever they can collect from people and businesses without causing harm to the economy. Keynesian economics and socialism always harm the economy. We're experiencing that right now with the economic mess and the out-of-control spending by Washington.

        So, no, get rid of that idea about Keynesian economics. It's voodoo economics.
        adornoe
      • Steel73: Increasing taxes on people is also a bad idea,

        especially in a bad economy.

        Raising taxes on corporations is an indirect way of raising taxes on consumers, because, the corporate taxes are passed on to the consumer via higher prices.

        Increasing taxes on the rich is just as much a negative, because, they are the ones keeping this economy going, and taking more from them means, again, that there will be less money in circulation in the private sector. The rich are the investment class, and they're the ones providing the investment to keep corporations going. And, taking money from the middle class, or the 200,000 and above, is most counterproductive, because, they also invest in the economy by spending on housing and food and entertainment and cars and everything else that defines an economy. You take away from the middle class and the rich, and you'll be destroying any hopes for growth and jobs.

        The fact is that, by reducing taxes, government revenue will grow as a result of a healthy economy which produces more jobs and more tax-paying workers, who also help to increase economic growth because, the more people that are working, the more spending there will be. That's been proven time and again. Cut taxes, and the economy grows, and so do government revenue. It may sound illogical to liberals, but it's been demonstrated to work each time it's been tried.
        adornoe
  • RE: Market meltdown likely to hit tech spending

    adornoe@... I hope your right but I'll not hold my breathe. This is a repeat, and we never saw the jobs that you suggest would come about then and I doubt they will appear this time. I think we are about to witness a new era. I think a lot of people are in for a rude awakening. I think old money will disappear. Get ready for the new Merry-go-round!
    walkedtallstoopedover
    • I have no doubt that free-market economics is the way to recover

      the economy.

      All we need to do is to cut taxes and reduce regulations to a manageable level, and cut government spending. If we don't, that's when there will be no hope at all.
      adornoe
  • It's time to re-read Adam Smith

    The problem is simple, America's growth loop is broken. In simple terms what we are saying is consumers have demand, manufacturers create products that meet that demand. Consumers buy the products. Cash flows from consumers to manufacturers hence keeping them in business. The cash is supposed to be used to grow the businesses and to employ the factory workers and hence create an American middle class. Pretty much what Henry Ford did.<br> <br>The problem is that currently a large proportion of America's manufacturing is off-shored. The means that instead of the cash going back to American workers, it goes to non-American workers, effectively leaving the economy. As a result the money does not turn in the economy, and the more consumers spend the more money goes offshore. In other words the more the American economy is stimulated with consumer spending the more money leaves the country leading to massive money supply problems and uncontrollable debt. <br><br>The result is the economy eventually runs out of money hence the debt crisis, housing crisis, etc... That is why countries like China and India are now taking off, they have experienced a massive cash injection from the US and are now creating their own growth loops in their own countries. This is 101 stuff extensively dealt with by Adam Smith in the Wealth of Nations.<br><br>My suggestion would be to manadate that all politicians, CEOs, Business School Lecturers read Adam Smith again in order to understand what made America great in the first place. Then a coordinated effort is required to get back to those fundamentals.<br><br>PS: If you want to understand what we mean by a growth loop go here:<br><br><a href="http://www.dawningtruth.co.za/our-approach/" target="_blank" rel="nofollow"><a href="http://www.dawningtruth.co.za/our-approach/" target="_blank" rel="nofollow"><a href="http://www.dawningtruth.co.za/our-approach/" target="_blank" rel="nofollow">http://www.dawningtruth.co.za/our-approach/</a></a></a>
    davidanthonylucas
    • Adam Smith was right, and you are only partially right...

      Did Adam Smith account for the offshoring problem? Perhaps not. And neither did our government, which is the reason for our offshoring. Companies might not be sending jobs and facilities overseas if it were not for government policies which make it more attractive for companies to take their production facilities and the corresponding jobs to other countries.

      Also, let's not forget that, those countries that are "getting richer" at our expense, are still dependent upon the U.S. remaining a viable economy. If the U.S. fails, so do they. China's economy is very dependent on having the U.S. as a client. That's why they will want to keep the U.S. afloat with their loans to us.
      adornoe