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In two weeks, on February 2nd, the eyes of the world will focus on Punxsutawney, Penn., and the trials and tribulations of Punxsutawney Phil, the world famous groundhog. If Phil sees his shadow, we get six more weeks of winter. If he doesn’t, spring is just around the corner.
This week, as fourth quarter earnings reports reach their peak, a similar process is under way. Do the earnings reports mean that winter’s economic slowdown is going to stick around? Or is a spring-like prosperity just around the corner?
Who truly knows what the groundhog thinks of this process, but we’ve been looking at some of the positive corporate earnings reports released this week for a sign that this time around, the economic frost is really going to melt.
For example, several of the companies that beat Street forecasts inhabit industry sectors that enjoyed rapid growth when the economy was running at a fever pitch in late 1999 and early 2000. Maybe they’re coming back.
Another positive sign was Intel’s statement included in its fourth quarter earnings announcement that its capital expenses will total $7.5 billion this year.
“Intel has such a strong balance sheet that they’re using this difficult market environment to up the ante against their competitors,” says Heather O’Loughlin, a technology analyst with Boston’s State Street Global Advisors.
The news about Intel’s higher budget should be welcome to businesses dependent upon the semiconductor sector. It’s worth noting that chip-equipment supplier Novellus Systems was among the firms that beat earnings forecasts this week. Unfortunately, the news in that sector wasn’t uniformly good. Teradyne, which makes chip-testing equipment, reported earnings that fell short of Street forecasts.
But network equipment maker Juniper Networks, and optical-chip manufacturer Applied Micro Circuits also beat Street forecasts. Juniper makes switchers and routers for fiber optic networks and has steadily gained market share at the expense of Cisco Systems. Meanwhile, Applied Micro Circuits makes semiconductors for high-speed, fiber-optic networks, and the company’s products have been hot commodities this past year.
Obviously, the lesson of the last eight months is that no company is immune to a broad slowdown. But if this week’s earnings results bear a message it’s that the economy is still growing in the sectors that are building its technology infrastructure. The new technology infrastructure will serve as a springboard not only for the next generation of the Internet, but an eventual economic recovery. But is that recovery upon us yet?
Unfortunately, O’Loughlin says the good earnings news from the fourth quarter isn’t proof that the worst is over. She didn’t think the economy bottomed out last year. In fact, she’s most worried about the first and second quarter and isn’t expecting a rebound until the second half at the earliest.
“I do not believe the worst is over,” she says. “IT spending could decelerate year-over- year.”
The vicious spiral that sucked in the dot-coms last summer has spread, O’Loughlin says. Once the dot-coms either went belly up or reined in their ambitious plans, their clicks-and-mortar rivals among the Old Economy retailers curtailed their tech spending, too. Since this trend is still being played out, O’Loughlin fears that the full force of the cutbacks won’t be evident until second quarter results are reported six months from now.
O’Loughlin describes the process as an arms race in reverse. Since dot-com tech budgets have shriveled, traditional retailers don’t need to spend so freely on technology either.
The slowdown in consumer spending is adding to the urgency of cutting IT budgets. Besides retailers, other consumer-sensitive sectors, such as autos and financial services, are also reining in their IT spending, and sooner or later that slowdown will take its toll on even the highest fliers in the tech sector.
The one wild card is the Fed and the interest rate policy the Federal Open Market Committee sets when it meets on January 30 and 31. A continued easing in interest rates could spur more consumer spending and re-ignite tech spending in the tech budgets among the sectors most sensitive to interest rates, such as financial services and retailing.
“Fed policy is critical here,” she says. “But we’re not out of the woods.”
Nor can we take our spring wardrobes out of the closet.