Who ordered this?
05/01/2001
Robert Haavind
Editor in Chief
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The semiconductor industry is used to ups and downs, so a downturn like this is nothing new. But 2001, according to last year's glowing forecasts, was supposed to be a continuation of a strong upswing. The dip of 1998/99 had been so tough that two or three years of recovery, maybe even more, seemed like a cinch. But the boom turned to bust. Why? Or, as some scalp-seekers are now asking: "Who did this to us?"
Today's favorite answer is "Alan Greenspan." The rumpled economist's reputation grew to Zeus-like proportions in the late 1990s, as the economy zoomed and unemployment hit new lows, but now that things have turned south, he is getting some heat. Because of his remarks about "irrational exuberance," some disgruntled investors believe the Fed was trying to deflate the stock market rather than just trying to curb inflation.
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Surely the signs of the downturn were not that visible a year ago in our industry. Most fabs, especially the foundries, couldn't make chips fast enough. The telecom infrastructure was being overhauled at light speed to carry burgeoning Internet traffic. US productivity was rising at a good clip as computer networks spread across industry and business. Dot-com mania was in full swing, with venture shops pouring billions into startups that would revolutionize the world. IPOs gushed from Wall Street to investors breathlessly giving their money away.
What a difference a year makes! Why did it all tumble so fast? Who ordered this? Alan Greenspan is an easy target, even though the Federal Open Market Committee (FOMC) includes 11 other voting members. The FOMC did keep raising rates even when the signs of a slowdown were visible. The higher rates were aimed at a modest slowdown - a soft landing. Instead, many economists feel we are slipping into a tough recession, with the lowering of rates this year coming too late to prevent it.
Blaming the Fed, however, appears to be much too simplistic. Many feel that the slowdown started with a sudden jump in oil prices a couple of years ago. Natural gas, a logical substitute fuel for factories, power plants and homes, quickly rose to record prices too. Low energy prices had discouraged costly exploration and development of new wells, curtailing supplies. There was similar underinvestment in new electric power plants, with demand rising much faster than supply. The tastes of US car-buyers switched to gas-guzzling SUVs and muscle trucks, making the energy crunch much worse.
If markets worked perfectly and investors had clear foresight, the available capital would be going to projects adding the most value to the economy. But it's not a perfect world. The dot-com craze drained a huge well of capital into wheel-spinning failures. The OPEC cartel succeeded in increasing its take by billions of dollars by pumping less oil. Global competition made it tougher to raise prices, so that higher energy costs eroded profits in business and industry. This led to the stock market decline. Consumer spending was going up faster than incomes, while businesses were upgrading networks and computers. Lower stock prices put a damper on both of these major economic drivers. Much of the discretionary spending, by both consumers and businesses, was for chip-based products.
Companies are now laying off large numbers of employees to help margins, making things worse. Many countries depend on exports to the US to boost their economies, causing the decline to spread worldwide.
Things will turn around. Applications will emerge to soak up the tremendous bandwidth that has been added to the telecom infrastructure. Pocket devices with wireless web access and e-mail capability will catch on. Corporations will continue expanding their use of network technology, and a few dot.coms with useful offerings and workable business plans will survive and prosper. With a few good profit reports, money could flow swiftly back into the stock market, raising consumer confidence. As markets turn upward, companies will take advantage of low rates to invest again.
But when? It could be in the second half of this year, as some forecasters say, or sometime next year. What will get it started? Maybe it will be Alan Greenspan's buying himself a powerful new computer with a high-speed modem to suck data off the Web. He'll clarify the picture for a confused Congressional committee with flashy 3-D econometric models, and, because he is now such a cult figure, it will hit the network news shows. Then we shall all have to run out and buy one to keep up. So maybe he didn't cause the downturn, but he could end up with the credit for a turnaround!
It's just a suggestion, but it might work.