U.S. economic wobble hurting Q2 tech outlook

To put it bluntly, U.S. corporate sales and profits are headed for a rough beating in the second quarter as weakness in the financial and construction sectors spread to all segments of the economy, including the technology sector.
Electronic companies serving the consumer segment are likely to be hardest hit, according to economists, although the corporate IT equipment market is also seen contracting as businesses tighten the purse strings, retrench staff to lower operating expenses or even shutter poor-performing manufacturing facilities locally and at international locations.

Those who still believe the growing economic problems would be constrained to the construction and financial industries should reconsider their position, said David Rosenberg, chief North American economist at Merrill Lynch & Co. Inc. in New York.

Rosenberg contends that financial lenders have tightened lending conditions across the economy, pulling back not just from high-risk borrowers and construction companies but also extending the cautionary approach to financing and investment activities to technology and other manufacturing outfits.

"A pullback in nonresidential activity negatively impacts the broad economy through both a direct and indirect path," Rosenberg said. "Directly, it detracts from GDP growth and leads to job losses, and indirectly, deterioration in commercial real estate exacerbates the credit crunch as financial institutions experience further write downs and constraints on their balance sheets."

Technology companies in some of the most competitive industry sectors are likely to face sales pressures as consumers focus on paying down debts. Areas that are most prone to consumer cautionary pressures include the wireless handset, digital music players, personal computer and video game box markets.

While it is expected that continued interest rate cuts by the Federal Reserve Bank—up to 75 basis points in the next few months—and the tax rebate recently approved by the U.S. Congress could help stimulate the economy, other problems lurk as the summer season approaches.

With crude oil prices reaching new highs, consumers will most likely see further erosion in spending power as gasoline costs soar during the summer months, according to economists. If crude oil prices continue to rise, gasoline could cost on the average up to $4 per gallon by the summer, they said.

The effect would be further pressure on consumer confidence, which—aside from a sharp tumble during the Iraq war in 2003—fell in February to its lowest level in 15 years, according to Lynn Franco, director of the Conference Board Consumer Research Center.

"Consumers' expectations have also deteriorated significantly and are now at a 17-year low," Franco said in a statement announcing the results of the last consumer confidence survey.

"With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase," she added.

The weak U.S. dollar may help fuel growth in domestic manufacturing, however. As U.S.-made products become relatively cheaper to overseas buyers, especially Europeans and Japanese, sales should perk up noticeably, according to Merrill Lynch's Rosenberg.

This is sweet and sour news for many U.S. technology companies. The weaker dollar isn't likely to positively impact their sales because a large chunk of their manufacturing costs is denominated in U.S. dollars.

For European technology companies, the weak dollar is a major problem, however. In addition to making their products appear more expensive to U.S. consumers, the weak dollar also translates into lower revenue when converted to the Euro or any other stronger European currencies.




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