Signs Look Bad for Tech Sector Spending

(MoneyWatch)  Over on ZDNet, Sam Diaz argued that a tech downturn won't be like the dot com bust and, for a number of reasons, that things won't get that bad. I've got to disagree ?€" not with his observations about how ingrained technology is, but on the ultimate outcome, because it depends on a whole lot more than how much people and companies want their gadgets and software. What is happening now could get a whole lot worse.

I really don't mean to dismiss the use of technology. I've been hip deep in it for decades, have been online far longer than people realized it was possible, and have seen how much time and effort I can save in my work. But that is immaterial. When times get tight, people and companies tighten their belts. They have to because they need to plan beyond today and not take chances.

One of the sectors doing the most belt-tightening is the financial services industry, and rightly so. It was largely insane combinations of greed and risky behavior that drove the economy into a ditch. As a consequence, many institutions are in reaction, avoiding any possible mistake and hording cash because they may have a lot more obligations to pay off. That's why banks wouldn't lend to each other, driving the perceived need for a credit bail-out. Unfortunately, it's the very sector that makes possible much of the purchasing that happens, at least in the U.S.

The news has been filled with questions about the mortgage market for months, but forget that for a moment and look at credit cards, the lifeblood of consumers. Now lenders are curbing credit limits and even card access.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

The credit card issuers have to turn back the spigots, because they are in deep trouble. Inactive accounts are being shut down, and application standards are getting tougher. People who are struggling with credit card debt now aren't going to clear things up with a different card or with a home equity loan. There's a reason that consumer confidence has hit a record low. People simply don't have the money to buy a lot and are scared enough that they want to keep what money they have in their pockets. There's a good reason for them to be that uncertain -- the definition of losing confidence -- because we have unique economic circumstances that don't lend themselves to business as usual.

I wouldn't bet on "necessary" corporate spending either. Loan defaults in corporate technology financing are on the rise. Banks are reducing credit even to large businesses. Yes, technology is key, but it's not as though companies couldn't cut back on everything but maintenance for a few years. A few corporations may have IT projects that are absolutely critical to their immediate operations, but my bet is that executives can say no far more easily than you might think.

I guess I agree with Sam completely on one point: This tech downturn won't be like the dot-com bust. It's likely going to be a whole lot worse. Maybe I'm wrong -- hopefully I am. But remember, sometimes instead of a glass being half empty or half full it's ready for something to be on the rocks.

Glass image by morgueFile user imelenchon, standard site license.