Wobbly economy spares no one
| • | Table: Two-month job losses |
By George Hager and Thomas A. Fogarty
USA Today
Telecommunications executive Wayne Williams says for the past 10 months, he has been living the future of the U.S. economy. It's a grim place to be.
As recently as a year ago, his telecommunications equipment company, Telect, racked up $265 million in sales on its way to nine consecutive years of 25 percent-plus growth. The privately held company in Spokane, Wash., had 2,300 employees in four countries and was planning a $150 million initial public stock offering.
Then the bottom fell out. Customers suddenly began canceling orders. Sales plunged 40 percent. Banks and suppliers grew uneasy. To keep the company alive, Williams will lay off more than half his employees by year's end. The IPO is dead for now, and the company's strategy has gone from managing growth to preserving cash.
For the first time, Williams, Telect's 38-year-old chief executive officer, says he can barely drag himself out of bed on days when he dreads the decisions ahead.
And he has an ominous warning for anyone who hasn't been where he has: "The rest of the economy is just now seeing the devastation we in telecom started to see in January," he says.
For months, the overall U.S. economy, while obviously slowing, seemed largely immune to the malaise plaguing telecom companies and most of the nation's factory sector, which has been mired in its own recession since late last year.
That immunity ended Sept. 11. Most economists say the terrorist attacks gave the already shaky economy a final shove into recession.
But there are huge disparities. Some sectors — housing, for example — could escape with just a slight slowdown, while a handful of others are in deep recession.
Those sectors — telecom, airlines, technology and the media — may see more months of layoffs and bankruptcies before they recover.
Federal Reserve policy-makers met last week and made their 10th interest rate cut this year to try to stop the economy's downward spiral.
Forecasters now expect the downturn to be comparatively short and mild: With luck, the economy should bottom by late winter before rebounding to moderately good growth by next summer.
The consensus of a USA Today survey of 47 economists is that the worst is happening now, in the year's final three months. The survey says the economy will shrink at a 1.5 percent rate.
That's only about half the worst decline of the 1990-91 recession, and not even a quarter of the sharpest contraction in the deep 1981-82 downturn.
Even Williams remains optimistic that business will eventually turn up. He's looking for things to decline for several months before a modest recovery begins.
"It's going to take a good three to six months to stabilize before we start coming out of it."
USA Today examined some of the hardest-hit sectors:
Telecommunications
The telecom sector was already headed for trouble before the slowing economy sent it to unprecedented depths.
Thinking the Internet would spur the need for bigger, faster communications networks, telecom companies racked up $600 billion in debt in recent years to build them. The demand never came, leaving phone and data carriers with huge debts, while the economy slowed sales of phone lines and cell phones.
Some analysts don't see a recovery until 2003.
As revenue plummets, telecom companies have responded by slashing 267,578 U.S. jobs through October.
That's the most cuts in any of the 25 categories tracked by outplacement firm Challenger Gray & Christmas.
"We're seeing layoffs that are just on a whole other scale," says CEO John Challenger. "I don't think we've ever seen layoffs like this."
With carriers cutting back or disappearing, their suppliers — equipment makers such as Cisco Systems and its peers — are losing billions in potential sales of switches, routers and fiber-optic cable.
One-time Wall Street darling Lucent Technologies piled up $16 billion in net losses in fiscal year 2001. And the industry slump is the main reason its payroll will shrink from 106,000 employees at the beginning of the year to about 60,000 by March.
Similarly, telecom equipment maker Nortel Networks, which posted more than $20 billion in net losses the past two quarters, is trimming its work force by more than half, to 45,000.
The industry's visibility is so poor that Lucent CEO Henry Schacht only tentatively predicts an uptick in early fiscal 2002.
"All we are giving is the best estimate we currently have, without a high degree of confidence," Schacht said.
Technology
The once-booming tech sector is limping along at its lowest point ever. Internet startups are going out of business at a record pace. Consumers are buying fewer personal computers, hurting not only PC makers but also the sellers of semiconductor chips that power the machines.
What's worse, it's unlikely that rate cuts by the Fed will spur demand for consumer technology goods.
U.S. consumers aren't using the proceeds from surging home refinancings to buy the latest technology, but instead to lower their overhead and pay off debts, says J.P. Morgan strategist Chris Wolfe.
"Consumers in the U.S. are acting like savvy business managers," Wolfe says. "Those holding out a great deal of hope for a large rebound in technology goods next year may be disappointed."
With PCs in more than half of U.S. homes, growth in the industry that powered the tech boom for the past decade is tapering. For the first time, PC shipments worldwide are expected to drop this year. Industry heavyweights Compaq and Hewlett-Packard proposed a merger to survive.
Similar problems have hit the cellular phone industry, as lackluster new Internet services failed to spark a rush to buy new phones. Merrill Lynch predicts global sales of 390 million phones this year, down 5 percent from 2000, the first yearly decline.
Merrill cut 2002 projections 8.8 percent to 410 million units. The industry had hoped for more than 500 million phone sales this year.
With PCs and cell phones lagging, the semiconductor chips that power them — made by Intel, Motorola and AMD — are less in demand. Motorola says the slump is the sector's sharpest decline in history.
Most analysts say global chip revenue will fall 20 percent to 30 percent this year.
Research firm IC Insights recently predicted that the semiconductor field's average yearly growth from 1995 to 2005 will hit 7 percent to 8 percent — far below its record 20-percent-plus rate of recent years.
Airlines
Air carriers, whose planes were the terrorists' weapons Sept. 11, have suffered the most devastating blow. Major airlines posted their largest collective loss ever in the third quarter. They are laying off 81,000 workers, not including 30,000 layoffs planned by aircraft-builder Boeing.
"It's far from over," American Airlines CEO Donald Carty told employees after reporting a $922 million third-quarter loss before government aid. "Clearly, no company can sustain this magnitude of loss for very long."
Major airlines lost $2.4 billion in the third quarter — and that's after receiving $2.1 billion in emergency federal aid, says Dave Swierenga, chief economist for the Air Transport Association, the industry's trade group.
United Airlines alone — with two jets hijacked and crashed in the attacks — lost nearly $1.2 billion, the most of any carrier. US Airways lost $766 million, the second-largest loss.
"The fourth quarter will be worse," Swierenga says. "How much worse, we don't know." Some analysts predict that the industry will lose $5 billion to $6 billion this quarter.
Terrorism alone didn't push the airlines into a nose dive. Most already were losing money after a sharp falloff in premium-priced business travel. The industry had expected to post a loss this year.
Swierenga says he's hopeful that some airlines will begin posting solid profits in the third quarter of 2002.
But if next year's second and third quarters — traditionally the industry's strongest time of year — are weak again, it could be the second quarter of 2003 before there's recovery, Swierenga says.
Media and advertising
Media companies are reeling from the downturn, largely because many became too accustomed to years that were unusually good.
Those that depend on advertising — broadcasters and newspaper publishers — are hardest hit.
Ad spending is expected to fall 6.6 percent in 2001, the first serious drop since 1942, when ad spending slid 4 percent.
Advertising had, and some say still has, a long way to fall. Ad sales boomed through the 1990s far faster than the overall economy did.
By 2000, advertising represented a larger percentage of the national output than it had since 1959. Sales peaked at $205 billion, with the boom in business from Internet companies, political candidates, and marketers capitalizing on the Olympics.
This year's collapse in ad sales exacerbated other powerful problems. Media companies were particularly troubled by the glut in movies, TV shows, networks, music, magazines and theme parks.
"There's too much of everything," says Vogel Capital Management's Harold Vogel. "Movies were already cratering (before the economy turned), and movie theaters went into bankruptcy. Television syndication had been difficult for many years, and cable margins have topped out."
Companies have responded with "continuing cycles of denial, cost cutting and reduced margins," says Sanford C. Bernstein's Tom Wolzien. Government stimulus efforts, he adds, have "worked on the stocks."
"They've been driven up in anticipation (of a turnaround). But the bottom lines continue to deteriorate," Wolzien says.
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