NEW YORK (CNN/Money) - The massive rounds of tech layoffs has helped the sector survive during unprecedented bad times. But if demand for tech products and services doesn't pick up soon, these companies might be forced to make cuts that are way too deep.
Last week, the AeA, an industry trade group formerly known as the American Electronics Association, released a study that showed that there were 560,000 fewer high-tech jobs at the end of 2002 than at the beginning of 2001.
And three notable tech companies announced sizable amounts of layoffs last week. Solectron said it would lop off 12,000 jobs, Gateway said it would layoff 1,900 employees and Applied Materials decided to eliminate 2,000 positions.
The war in Iraq will probably keep a damper on the job market, said Mark Zandi, chief economist for Economy.com, a consulting firm. "This should be a year where the tech market stabilizes but I don't see job growth until 2004," Zandi said.
Zandi said that a swift resolution to the war could restore corporate confidence, which in theory should lead to more spending on tech and thus, a better job market. But what if this best-case scenario doesn't materialize?
Then tech companies will face a dilemma. Zandi said tech companies would need to lower their expenses even further. "If revenue growth does not start to pick up that would squeeze profit margins," said Zandi. In other words, if companies can't find a way to continue trimming costs, their earnings could suffer.
The unkindest cuts?
But many techs seem to realize that they can only cut so much. In fact, the pace of layoffs has started to slowdown. John Challenger, CEO of employee outplacement firm Challenger, Gray & Christmas, said in a telephone interview on Monday that the number of telecom layoffs during the first two months of 2003 dropped 78 percent from a year ago.
Other subsectors of tech saw a steep decline in job cuts as well. "The tech sector has worked off a significant amount of the bubble effect of the late '90s," said Challenger.
Since the payrolls of tech companies aren't as bloated as they once were, companies may no longer be able to cut jobs as aggressively because they could risk losing customers.
"With all the layoffs tech companies have made, it's getting awfully hard to make more cuts without degrading their businesses," said Kevin Fogarty, an analyst with Illuminata, a high-tech consulting and research firm.
That's not good news. Investors are clearly banking on a tech recovery. The Nasdaq, even with Monday's nearly 4 percent pullback, is still up 23 percent from its early October lows. And according to data from Thomson/Baseline, the S&P Technology index is trading at 30 times 2003 earnings estimates, a pretty pricey multiple.
To be sure, analysts are predicting 28 percent earnings growth for the S&P technology sector in 2003. But revenues for the S&P tech sector are only expected to increase 2 percent this year.
So the strong earnings outlook for tech is predicated more on lower expenses, not an increase in demand. And many techs are running out of room on the cost-cutting side.