Labor report indicates squeeze on tech sector

Associated Press — Fri, 03 Oct 2008 13:50:10 -0700

The economic slowdown has started to squeeze the technology sector. So far this has not led to wide-scale job cuts, but a slowing demand for computers and other electronics may already be weighing on some payrolls.

Computer and electronics manufacturers did not grow their work forces at all in September, according to data released Friday by the Labor Department. In comparison, such companies added 5,100 jobs in August.

Telecommunications companies, meanwhile, cut 3,400 jobs in September.

Overall, U.S. employers slashed their payrolls by 159,000 in September, the most in more than five years. Many of these jobs were in manufacturing, construction, retail and financial services.

Until recently, the tech sector was considered a relatively safe haven in the turbulent economy, though by no means was it immune. But now even investor favorites like Google Inc. are seeing sharp declines in their stock price. The company's shares tumbled 24 percent during the third quarter.

And shares of tech bellwether IBM Corp. are down nearly 8 percent since the beginning of the week, though the company, along with Hewlett-Packard Co., had widely been considered among the safest bets amid the slowdown.

"The impact from the credit crunch is translating into significant weakness in the real economy and will likely pressure 2009 (information technology) budgets," Deutsche Bank analyst Chris Whitmore wrote in a note to investors Friday.

The analyst cut his estimates and stock price targets for most hardware companies he covers, saying demand for technology products "will be pressured by deteriorating consumer spending."

Whitmore called IBM "the most defensive" stock he covers, because about half of its revenue is recurring, from long-term contracts.

Software companies, whose products can help businesses save money, are also among the tech vendors that have held up well so far. In September, companies in computer systems design and related services added 8,500 jobs — more than the 6,300 added in August.

Whitmore said companies like Sun Microsystems Inc., data storage provider EMC Corp. and Xerox Corp. are at the greatest risk for lowering earnings estimates. They have a lot of fixed costs, and many of their products are discretionary and are sold in separate transactions rather than through recurring deals. And Whitmore expects the weaker demand to speed up job reductions at hardware companies over the next three to six months.

Contract manufacturers are also feeling the squeeze. On Thursday, Longbow Research analyst Shawn M. Harrison cut his third-quarter revenue and earnings estimates for electronics manufacturing service providers like Flextronics International Ltd., Celestica Inc. and Plexus Corp. citing weaker-than-expected sales to markets such as consumer electronics and telecom infrastructure.

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Labor report indicates squeeze on tech sector