Uncommon Wisdom

Sep 30 2008   12:53PM GMT

Recession unavoidable; tech slump will increase

Tom Nolle Tom Nolle Profile: Tom Nolle

Against all odds and the advice of party leaders on both sides, the House has failed to pass the rescue bill. The problem came as Republicans deserted their leadership en masse and failed to support the bill. Democrats had previously indicated they would not accept responsibility for voting a measure that a Republican administration recommended unless it was supported by Republicans in the House, which failed to happen.

As we have indicated earlier, failure to pass this bill promptly would in our view put the U.S. into recession, and we believe that unless the current situation can somehow be recouped convincingly today, there is little or no chance that recession can now be avoided. We will publish an updated model result in our October Netwatcher newsletter issue, but it now appears to us that the odds of a recession worldwide and a tech spending slump have increased.

Regulators in Europe stepped in to rescue Dexia, a bank that has specialized in loans to state and local governments, offering the bank nearly $10 billion in loans. Dexia was among the EU banks considered to be in trouble, and the U.S. credit crisis is expected to continue to have broader impact in Europe unless a quick solution is found.

Our readers know that we have viewed the 2009 tech market health as depending on the timing of a U.S. recovery versus an EU turndown, and it now appears that the U.S. recovery is delayed and the EU turndown is accelerated. That makes it much more likely that tech spending will be curtailed worldwide in 2009, not only killing growth but actually creating a small decline in constant dollars.

Hope for a new plan that will pass is widely held, and stock futures this morning and the experience of foreign exchanges both suggest that the market is pricing in such a conclusion. The question will be one of timing.

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