What Happens to Tech if Consumer Spending Doesn’t Rebound?

What happens to Silicon Valley, and to the technology world in general, if consumer spending doesn’t bounce back?

Despite hopeful pronouncements from economists and business media about a nascent economic recovery, American retailers still confront tapped-out consumers reluctant to spend the meager discretionary income they have at their disposal.

When they’re not being optimistic, economists will inform you that consumers account for 70 percent of expenditures in the US economy. In other western economies, the percentage of consumer spending is closer to 65%, which is still a lot.

Think intently about that reduced retail spending and consider that it might persist for a long, long time.

I hate to be the bearer of bad news — in certain societies, that distinction can occasion nothing but grief — but we’re not in a standard, factory-issue recession.

There’s something bigger happening here, and not everybody has recognized it, though consumers, to their credit, haven’t bought the blandishments from on high that it’s okay to go back to the free-spending habits that contributed to (but did not create) the bubbles of yore.

For years, the world worked on the basis of US consumption of Chinese-manufactured goods. The Chinese would underwrite that consumption by buying US treasuries. Banks kept the party going by extending cheap credit to everybody that needed it and many that didn’t. The party seemed as though it would go on forever.

But nothing lasts forever, as Roxy Music told us in “The Same Old Scene.” Even credit-fueled bubbles end, it turns out. And, as at the conclusion of many parties, nearly everybody wakes up the next day with a severe hangover.

American consumers cannot keep the party going. They are financially strapped, with less income than they had before, less job security, reduced-value assets in the form of securities and real estate (including their depreciated homes).

Credit doesn’t come easily anymore, either. Banks have become more stringent in lending policies. Even if many consumers wanted to spend, they wouldn’t be able to get the money to do so.

As noted above, this situation will be with us for a long time.

Here’s a question to ponder: With the US consumer no longer able to fuel economic growth with his spending — and with European consumers unlikely to pick up the slack — who’s going to buy all the goods that manufacturers will churn out to restock depleted inventories?

For the time being, it won’t be Chinese consumers. They’re not ready to take the baton. Even as they gradually assume that mantle, they’ll be inclined to buy Chinese-made goods rather than those made in America or Europe.

So, we find ourselves in an uncomfortable global economic transition, not a typical recession. We live in interesting times, and, as the Chinese proverb suggests, that’s not always a good thing.

What does it mean for the Valley and for information technology? It probably means all bets are off regarding a revival of IPOs on a grand scale. It probably means venture-capital spending will remain depressed and highly selective. It also means exits, even by acquisition, will be few and far between.

What’s more, many Web 2.0 companies predicated on robust spending by the American consumer will become lost causes. Paid content directed at consumers also will fail. (Hear that, Rupert Murdoch?) Consumers will be able to pay for their Internet connections, but they won’t have enough spare change to spend on for-pay online news content.

As unfulfilling as they have been for countless content purveyors, advertising-based business models will be the only game in Web 2.0 town. Consumers won’t have the discretionary income to spend on content. Regrettably, advertising spending will be constrained by the diminished pay off from enervated consumer spending.

It’s a world of diminished expectations.

There’s always opportunity, though, and one that I definitely see ahead is for anything that helps businesses and consumers cut costs, become more efficient, and do more with less. Just as so many technology companies have been slashing costs, often by jettisoning employees, consumers will be looking to reduce their overheads, too.

For the time being, as top-line fortunes recede from immediate view, the world will become all about reduction of operating expenditures.

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