TECH COMPANIES BENEFIT FROM GLOBAL DEMAND !

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Will a slower economy sink Silicon Valley's fortunes, too?

TECH COMPANIES BENEFIT FROM GLOBAL DEMAND

By Pete Carey
Mercury News

The dollar is dropping, financial firms have lost billions of dollars in subprime loans, credit is tight and the stock market this month has given up all the gains it made last year.

But there's an almost surreal disconnect between the economic chill that has gripped the rest of the country and the forecasts for Silicon Valley.

Even as the national economy teeters on recession, predictions for the valley's economy are surprisingly optimistic: At worst, many economists expect a temporary slowdown this year. That is, assuming there is no global recession.

"There's a lot of hand-wringing about technology right now," said Steve Cochrane of Moody's Economy.com, "but the bottom line is global demand is still pretty strong, particularly for new designs, new equipment and chip manufacturing plants overseas."

That global demand should help Silicon Valley make it through with relatively little damage.

Venture capital investments are stronger than they have been in years.

And despite the battered Nasdaq and some lackluster earnings reports, demand for technology remains high.

"Silicon Valley is in better shape than the overall U.S. economy," said John B. Shoven, director of the Stanford Institute for Economic Policy Research. "My overall assessment is the Silicon Valley economy is going to come through this pretty well unscathed."

It's not that the valley is immune to the nation's troubles. Jittery




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consumers are cutting back, stock options are losing ground as share prices continue to slide, and the real estate industry is contracting.
Here's a look at some key areas:

Housing

Lower-priced homes are getting even cheaper and buyers aren't stepping forward, while prices for homes in wealthier sections of the valley are holding up - so far. It's a split market in which parts of San Jose have seen hundreds of foreclosures while demand remains strong in the northern part of the county. Still, the valley's economy is not closely tied to housing.

Jobs

The region added jobs in December for the third consecutive month, and its unemployment rate is a full percent lower than the state's average.

"For professional services, engineering and technology, we're still looking at a shortage of candidates and a plethora of openings," said Tim Thompson of Spherion, a technology and engineering staffing service whose managers in Silicon Valley remain "pretty bullish."

Wages

Over the next few years, the San Jose region is expected to lead the state in personal income growth and will continue to have among the highest wages in the state, according to a 2007-2010 California forecast by the Eberhardt School of Business at the University of the Pacific.

"Any time you continue to lead the state in income levels, income growth and wage growth, you're doing OK," said the business school's dean, Chuck Williams.

The only place Williams sees the valley lagging is in housing starts, which could contract construction jobs. But commercial and government construction should pick up the slack, according to Richard Carlson of Spectrum Economics in Mountain View.

Technology

The valley's 150 largest public companies have lost a median 13.1 percent in share price so far this year, but many of those companies remain optimistic.

Take Seagate Technology. More than 70 percent of the Scotts Valley disk-drive maker's sales are overseas. It is running at maximum capacity and posted a 14 percent quarterly increase in sales last week. Nevertheless, Seagate saw its stock drop 7.7 Friday in what Chief Executive Bill Watkins calls "a fear market."

Watkins said he's talked with other valley executives and, like him, they're not seeing a recession here.

"Sure, it could happen, but we'll get through it," he said.

The drop in the dollar's value is seen as a plus by many of the valley's global tech companies. "The dollar's collapsing - that is valley heaven" because it improves the competitive position of the export-heavy tech industry, Carlson said.

"We have been slowing, but it's a temporary slowing," said Stephen Levy of the Center for the Continuing Study of the California Economy, "because it doesn't have anything to do with the core of our economic base."

Venture capital

Venture capital, an engine of job growth, so far has not felt any measurable impact from the nation's economic malaise, said Joseph Grundfest, who teaches a venture capital course at Stanford University law school, though he said "it remains to be seen" how the national picture will affect the valley.

"Venture capital is uncannily stable," said Greg Belanger, a Palo Alto-based Comerica Bank executive. "We see pretty strong new company formation and early stage investing. We see the venture capital market as being really quite good."

There's continued demand for office space from start-ups and companies founded in the past decade, though the demand for big corporate campuses has slowed, according to Phil Mahoney, a broker with Cornish & Carey Commercial.

Nevertheless, the tech industry faces some challenges, according to Tobias Levkovich, top equity strategist at Citi Investment Research.

Corporate profits and credit conditions "are pointing south right now," he said.

The national malaise could affect spending on information technology, which would slow job growth, he believes.

"The S&P 500 and the financial sector are going to have resistance to spending money," Levkovich said. "And when we talk international, keep in mind that leading indicators outside the U.S. are falling."

If that continues, the valley could experience deeper problems, said Cochrane of Economy.com.

"It's not difficult to devise a scenario in which we have at least a North Atlantic if not a global recession," he said. "Then there's no escape, because Silicon Valley is so tightly linked to the global economy. That's the greater risk we have to watch for."




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Contact Pete Carey at pcarey@mercurynews.com or (408) 920-5419.