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OPINION: ERIC J. SAVITZ Alan the Router Salesman
High-tech is suffering from a supply glut. But Greenspan & Co.'s rate-
cut solution is like trying to cure indigestion with Preparation H.
May 21 2001 12:00 AM PDT
Give Alan Greenspan credit for persistence. With last week's cut in
short-term interest rates, the fifth in five months, the Federal
Reserve reaffirmed its determination to keep the economy out of
recession. In announcing the cut, the Fed expressed particular
concern about the continued slide in capital spending. "The erosion
in current and prospective profitability," the Fed said in a
statement, "in combination with considerable uncertainty about the
business outlook, seems likely to hold down capital spending going
forward."
The good news is that the Fed is worrying about the right issue. The
bad news: It lacks the tools to solve the problem.
Capital spending represents dollars invested by businesses on
infrastructure: buildings, furniture and, of course, computing and
telecommunications gear. Indeed, when it comes to capital spending,
tech is where the action is - and where it has been for many years.
Consider some fascinating data compiled by James Bianco, a financial
market pundit who plies his trade from Barrington, Ill. Bianco noted
last week that as a percentage of the GDP, nontech capital spending
has been falling for 20 years, from 12.2 percent in December 1981 to
about 6.7 percent by the end of last year. This, he concludes, cannot
possibly be what concerns Greenspan; the economy has been growing
quite nicely throughout most of this two-decade slide in nontech
capital spending.
By contrast, high-tech capital expenditures have been rising for many
years - in fact, they accelerated in the 1990s. As a percentage of
GDP, high-tech capital spending increased from just under 1 percent
in the late 1960s to a tad under 3 percent in 1994 to an all-time
high of 7 percent in December 2000. As Bianco observes, tech, which
made up one-quarter of capital spending in the early 1990s, now
consumes more than half. "If Greenspan is worried about [capital
spending], it is reasonable to assume that high-tech [capital
spending] is what he is really worried about," Bianco asserts.
Certainly, tech-related spending is what investors are worrying
about: Witness the Nasdaq's slide from 5000 to below 2000, for
instance. The obvious question, then, is whether the Fed's rate-
cutting campaign will actually succeed in spurring sales of routers
and servers and such. The harsh truth is that the outlook for this is
not encouraging.
Companies have spent so much on high-tech capital goods in recent
years that they just can't absorb all their purchases. What we have
is a problem on the supply side. There are too many routers, too many
servers, too many disk drives, too many personal computers. Greenspan
has responded by cutting the cost of capital, which generally
stimulates demand. But demand isn't the issue. It's supply.
Corporate America has feasted on technology goods, and now it is
suffering indigestion. Reducing the price of steak will not increase
the appetite for more. We're stuffed. No amount of Fed easing will
boost tech spending in a saturated market.
Nonetheless, most economists believe the Fed will follow with at
least one more half-point cut. But that won't help tech businesses
any more than the other five rate cuts have. It is possible that the
Fed can do enough to help other parts of the economy to keep us out
of an official recession. But when it comes to what ails the tech
industry - a huge excess of supply - Greenspan and friends don't have
the tools to fix the problem.
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