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US slowdown: Is the worst over? - Views on News from Equitymaster
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  • Mar 2, 2001

    US slowdown: Is the worst over?

    For those apprehensive about the technology sector here is another one. The software major Oracle expects to report earnings for the quarter ended 28th February, below market expectations. This, according to the company, was due to the slowdown in the U. S. economy.

    According to Larry Elision, Oracle’s CEO, growth was strong in the first two months of the quarter, and it seemed the company could meet it internal sales targets. However, in the last few days of the quarter that is in February, the company missed its targets. This was due to the fact that a substantial number of its customers deciding to delay their IT spending based on the economic slowdown in the United States. However, sales growth for Oracle products in Europe and Asia Pacific remained strong. The problem was mainly with the U.S. economy. This does allay one fear that of a global economic slowdown that many have been talking about.

    Last week, Sun Microsystems, the leading supplier of Web servers, joined the list of companies that have given profit warnings. Its revenue growth for the quarter ending March would be nearly half of what it had previously expected. This was again attributed to the weakness in the U.S. economy.

    These two pieces of news are of great significance due to the fact that both their products play a critical role in the development of e-business solutions or e-commerce. This is one area to which the Indian software companies have a significant exposure. And certainly a slowing down in the sales of building blocks for IT e-commerce solutions would lead to a slowdown in the sales for software.

    However, a few facts have to taken in to the picture. The number of dot-com clients that were perhaps the largest users of Oracle and Sun products in the recent times have reduced significantly. Thus the shortfall could be also attributed to the dot-com ebb rather than the slowdown alone.

    The critical issue is what about the Indian software companies? Do they take a hit? The strongest point in favour of the Indian companies is that their size is nowhere near Oracle and Sun Microsystems. Most of the companies have very low dot come exposure.

    But more importantly the worst of the slowdown might be over. There seems to be good news around the corner. The National Association of Purchasing Management's (NAPM) key index of manufacturing activity rose to 41.9 in February from a reading of 41.2 in January.

    Could the slightly higher reading be interpreted to mean that the slowdown in the manufacturing sector may have reached an end? Many do feel that way. Also, the Commerce Department in the US said construction spending jumped a higher than expected to 1.5% in January. But the construction industry as a whole has bucked the slow down.

    The improvement in figures for manufacturing could be due to the two rates cuts by the Fed. Once the manufacturing sector picks up the effect will be cascaded to the services sector. This would again give the consumers confidence to spend. Consumer spending, which accounts for about two-thirds of U.S. economic activity, rose by 0.7% to in January, after a 0.4% growth in December.

    According to Greenspan' the sharp economic downturn at the end of 2000 "seemed less evident” in January and February. Also, foreign broking houses that had previously downgraded key IT stocks to hold have again changed the recommendations to buy.

    Is the worst over? Only the NAPM figures for March will tell. Meanwhile, keep praying.



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