Saturday, May 19, 2001

Silicon Valley slipping into worst recession since early '90s BY DAVID A. SYLVESTER Mercury News After an unprecedented five-year boom, Silicon Valley is now slipping into its sharpest recession since the early 1990s, one that could bog down the economy for the rest of the year.

That's the best estimate of economists who are watching how the national slowdown is hitting the high-tech industries in Santa Clara County particularly hard.

``Whether we have a national recession or not, we have one in Silicon Valley,'' agrees Ken Rosen, chair of the Fisher Center for Real Estate at UC Berkeley. ``It could last from six months to two years.''

Santa Clara County's total production of goods and services is expected to shrink by 1.6 percent from April through June, according to a regional estimate by Economy. com. That amounts to a decline of $2 billion in output, measured in 1996 dollars, over this year.

At the same time, the other major measure of the economy's health -- employment -- is also suffering. Although official numbers aren't available yet, about 13,000 industrial jobs -- more than 1 percent of the county's total -- are expected to disappear, the firm believes.

Still, the good news is that it isn't as bad as the recession of 1990-91, when Santa Clara County lost nearly 24,000 jobs over a painful two years and didn't recover until 1995.

``This downturn isn't as serious as the early 1990s,'' said Steve Cochrane, regional economist at Economy.com.

To get an idea of what's happening to Silicon Valley's economy, think of riding in the middle car of a roller coaster. Even after the lead car makes the plunge, you are still heading up -- which is why some economic signs remain strong while others are falling. And it's hard to know where you're going until your car hits the top of the hill and you can see down.

How did the go-go economy of just last year turn such a sharp hill?

Basically, Silicon Valley's economy got a jolt of growth all at once. Corporations feverishly upgraded computer systems for the Y2K scare that never materialized. Then they bought Internet equipment to produce Web sites to compete with the dot-coms. And a historic surge in venture capital investment fueled the dot-coms that are now imploding.

None of this will happen again soon.

``We overshot in 1996 to 2000,'' Rosen says. ``We took one-time demand factors as permanent.''

The clearest indication of where Silicon Valley is headed comes by looking at the lead car, corporate investment spending on the information technology that valley companies make.

The budgets for spending information technology are only going up by 7.2 percent over the next year, according to an April survey by CIO Magazine of 229 chief information officers at major corporations nationwide.

While that is still an increase, it's far less than the 18.4 percent annual increase companies expected last August. More significantly, that rate of spending is considerably less than the 10.3 percent increase built into current budgets, so that IT spending could still fall more over the next year.

The biggest question is how this downturn will spread to other sectors in the local economy. Among the worrisome signs are:

Bay Area inflation is still higher than the national average. The growth in the Consumer Price Index eased off slightly in April to an annual rate of 5.8 percent, but that's still higher than 3.3 percent nationally. Next month, housing prices may fall somewhat to soften inflation, but electricity rate increases will hit utility bills hard and gasoline prices are now breaking $2 a gallon.

A glut of commercial office space is developing as companies find they have leased space they can't use now during a retrenchment. Santa Clara County's vacancy rate for commercial space is about 7 percent, and rents have started to fall, according to a survey by BT Commercial Real Estate.

Auto sales have dropped sharply. According to registration figures from the Polk Company, sales of new cars and trucks in Santa Clara County are down 17.2 percent in the first three months of 2001, compared to the same quarter last year. Nationally, the figure is down 5.8 percent from all-time record sales in 2000. ``Increasing power costs, higher gas prices and the uncertainty of the economy -- it makes for a potent combination that keeps people on the sidelines,'' said Joseph Vignone, the head of Ford's San Francisco regional sales and marketing office.

Much of the decline, noted both Vignone and Art Spinella, the head of CNW Marketing Research in Bandon, Ore., comes from the loss of fleet sales by large companies. About 31 percent of Ford Taurus sedans, for instance, go into corporate, government or rental fleets.

Still, the recession isn't hitting everywhere at once.

New businesses are still forming and registering in Silicon Valley's largest city, San Jose. In April, 998 individuals and firms filed to pay the city's business tax as new businesses. That's up 28 percent since January, and a sign of optimism in good business conditions.

Construction permits in Santa Clara County for commercial office space are 33 percent higher for the first three months of this year over the same period a year ago, although it's unclear how many of these projects will go forward. Residential permits have fallen from a year ago, but they're still 20 percent higher than during the first three months of 1999.

Houses remain in short supply in Santa Clara County, compared to the 200,000 jobs created in the 1990s. Even if housing prices decline among the most expensive end of the market, there's still demand for the medium-priced houses, said Steve Cochrane, regional economist at Economy.com. When will the tech economy turn around? It depends on how long it takes before corporations start buying equipment again after the binge last year. For instance, some companies have everything from fiber optic cables to satellite dishes that they bought and aren't using.

``We don't know how much fiber optic capacity is not being used,'' says Mark Zandi, chief economist at Economy.com.

As Silicon Valley CEOs have said repeatedly, there's poor ``visibility'' for the time being.

``The Valley has hit the bottom of the valley, and it's going to stay there a while,'' says Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown in New York City.

(Mercury News reporter Matt Nauman contributed to this report.)

http://www0.mercurycenter.com/business/top/001124.htm

-- Martin Thompson (mthom1927@aol.com), May 19, 2001

Answers

It all starts here, in Silicon Valley. It's hi-tech that's been responsible for the 5%+ productivity gains of the past 5 years. Now, with the sputters here, and productivity now in the negative column, watch out. If ever a better indicator of coming recession was on the horizon, I haven't seen it yet.

-- JackW (jpayne@webtv.net), May 19, 2001.

"This downturn isn't as serious as the early 1990s,'' said Steve Cochrane, regional economist at Economy.com."

Well I think Steve Cochrane is overemployed. We have today a number of things that didn't occur in the early 1990's. Gas that has crested the psychological $2.00 barrier, very expensive electricity which is going to shut down a lot of energy intensive industries, a bubble that burst and the beginnings of a global recession.

What I'd like to know is how I can get paid $60-$100,000 a year for ill-informed opinions?

-- Guy Daley (guydaley1@netzero.net), May 19, 2001.