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The Starting Line: Rate cuts no quick fix

It will take more than interest-rate cuts to get technology companies back to not-so-long-ago days of growth.

It will take more than interest-rate cuts to get technology companies back to not-so-long-ago days of growth.

"The Federal Reserve can help the corporate sector return to profitability, and that will help the technology sector," said Gerald Cohen, senior economist with Merrill Lynch. "But patience is a virtue."

Most analysts believe that when the U.S. central bank's Federal Open Market Committee closes its meeting Wednesday it will reduce the overnight lending rate for the sixth time this year, but guesses on the size of the reduction vary--from 0.25 percent to 0.5 percent. The Fed so far this year has cut 2.5 percent from the overnight rate, or the fee charged for short-term loans from one bank to another.

"We think the Fed is close to the end of the current easing cycle," wrote Richard Berner, chief U.S. economist for Morgan Stanley, who predicted a 0.25 percent cut in the short-term rate.

Just don't expect the technology industry to start rebounding right away on the back of this year's interest-rate cuts.

Cutting interest rates makes borrowing cheaper, which theoretically lets companies buy more of everything, including technology. Given the economy recently, few analysts would argue against easing the money supply to boost capital spending.

"Businesses in general have just cut back," said Kevin White, an analyst with IDC's Global IT Research department. "An interest-rate cut delivers quite a bit to the IT market. Rate cuts should help to restore information technology spending going forward."

Cohen agreed. "Most of the tech industry's problems are kind of profit squeeze related," he said.

More than the interest rate
Yet other things besides an economic jolt could power the tech industry higher.

Next year will be time for another round of major upgrade cycles for corporations, which generate 80 percent of all technology spending, White said.

This fall could see a Microsoft-driven boost to the tech market, which soared after the release of the company's Windows 95 operating system six years ago, the IDC analyst said. Several PC and chip companies have already said they expect gains in the late third and fourth quarters because of Windows XP, which Microsoft touts as its most significant operating system release since 1995.

Just as more than the economy has electrified IT spending, more than the economy has hurt IT spending.

The rapid expansion of communications systems in the late 1990s and 2000 led to a network glut, which in turn led to an oversupply of network equipment that forced companies such as Cisco Systems and Nortel Networks to write off billions of dollars in unsold hardware.

On the PC front, a saturated U.S. market and a lack of any compelling reason to upgrade have been widely cited as reasons for an industry slump that began last fall. And at least a few analysts have argued that corporations have gorged on e-business applications and other technologies designed to make companies more efficient.

"The economy is an important fact, but it's not the only one," White said.

Even those who believe economic revival would be the biggest help for the tech industry aren't optimistic about the next few years. The effects of any interest-rate cut won't be felt until late in the third quarter, economists say, because six to nine months usually pass before interest rate changes start to be felt. As many as 18 months can pass before the full effect hits, Cohen said.

And technology is unlikely to return to its peak of 25 percent growth in 1999 and 2000, the Merrill analyst believes. Merrill Lynch predicts 2002 growth of 15 percent, about in line with the tech industry's average annual gain since 1959.

It will take more than economic or financial maneuvers to accelerate that rate of expansion, Cohen said.

"What you need is innovation to continue," he said. "When you get the innovation, you get obsolescence. And when you get obsolescence, then companies need to invest in new technology."