Free-falling interest rates may be a boon for the economy at large, but technology companies aren't likely to see significant short-term gains, economists say.
Fearful of last month's terrorists attacks pushing the United States and world economies into serious recession, the Federal Reserve Bank acted Monday to cut interest rates substantially, the second such move in just three weeks and the ninth this year. Interest rates are now the lowest they've been since the early 1960s.
But industry watchers say a host of issues, ranging from inventory gluts to a paralyzing uncertainty about the future, will keep many technology companies from feeling quick effects of the series of rate cuts. Particularly in telecommunications, where a massive building spree has dissolved into a hangover of debt, overcapacity and bankruptcy, the salving influence of lower interest is unlikely to make itself felt, experts say.
"I don't think it makes much difference," said Larry Darby, a telecommunications consultant and former chief economist for the Federal Communications Commission Common Carrier Bureau. "The problem here is less the cost of capital than it is...the unwillingness to take market risks in an atmosphere of uncertainty."
Technology companies that sell PCs, servers and other equipment with shorter production cycles will likely feel some beneficial effect, as their customers are able to borrow money more cheaply to fund capital investments, and as they are able to fund their own businesses more cheaply. But research into at least one large group of fast-growing companies seems to show that previous rate cuts aren't prompting more borrowing yet, a sobering sign for the technology industry.
In a PricewaterhouseCoopers survey of 410 "fast-growing" companies, about half of which were technology related, borrowing rates actually went down in the past year as interest rates progressively fell. The number of companies taking out new loans fell by 11 percent in the year leading up to July 2001, even as the overall cost of borrowing fell by more than 20 percent.
That should be a sobering sign for the economy at large, as well. Although technology spending accounted for just 20 percent of United States business investment in 1990, it neared a full 50 percent of corporate investment in 1999, according to Bank of America estimates.
Spending money faster
Interest-rate cuts of the kind pursued by the Federal Reserve are a blunt but traditionally effective way of stimulating the economy, free of the political distortions that might come with a tax cut or spending package.
The theory behind them is simple: By reducing interest rates, the Fed hopes to boost the economy by making it less expensive for consumers and corporations to borrow money. Cheaper credit can lead individuals to purchase cars and homes, for example, and encourage businesses to fund major projects such as building power plants or office buildings.
Different companies and industries react differently.
Young technology companies, such as Internet or software start-ups, often see very little immediate response to interest-rate cuts. Banks tend not to lend large amounts of money to these companies even in ordinary circumstances, pushing them instead toward venture capital. And rate cuts have no influence on the decision of a venture capitalist to take a bet on a risky new idea.
Telecommunications investments also tend to be driven more by capacity demand than by small changes in the interest rates. And since analysts say there appears to be substantial overcapacity in this market, stemming from the frenzied building of fiber-optic networks across the country during the past few years, little immediate demand is expected in this area.
Companies like Cisco Systems, which have seen a steep drop in demand for their network components, could see some small uptick in demand as network companies find it cheaper to borrow money to buy the last components of networks needed to "light" them, or turn them on. But Cisco and many of its peers are still in the midst of a bad inventory glut, stemming from canceled orders and overoptimistic forecasts.
Computer and consumer-electronics companies are suffering from their own inventory issues, since many have been loath to ratchet down production to meet today's anemic demand, even if it has meant building up even more extra inventory. Even if businesses do start buying technology like PCs for offices, computer and electronics companies have a ways to go before this situation turns around.
"Inventory issues on the whole were being dealt with," said Sean Wargo, senior industry analyst for the Consumer Electronics Association (CEA). "Now we've been set back again. We're probably looking at mid-next year before there's a turnaround."
But at the core of companies' problems is uncertainty, economists say. Executives don't know what customers will want, whether the nation will be at war six months from now, or what the financial situation will be like in a year. None of this adds up to a willingness to spend on new servers, new networks, or any expensive high-tech gear.
"In the long term, yes, (it will help)," said Paul Weaver, chairman of PricewaterhouseCoopers' Global Technology Practice. "In the short term, this is such a jittery economy that I don't think people are going to wake up tomorrow and say, 'Lets start borrowing.'"