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The Self-Fulfilling Prophecy

David Burnett
Founder, Technopreneurial.com
September 2001

I rarely watch TV--but for the past few days, I have been glued to CNN. As an overseas American, I watched in horror from my hotel room in Hong Kong as the World Trade Center towers collapsed live before my eyes. Minutes later my mobile phone started ringing as my family members called to share the news. And almost instantly, my Hotmail inbox was filling up with messages from friends and with forwards about the terrorist attacks.

Technology brought the impact of Tuesday's tragedies to the world--but, unfortunately, technology companies will not be spared by the potential global economic repercussions that threaten to prolong the current downturn. Predictions from economists and market analysts are mixed, but the majority believes that Tuesday's events will delay any type of economic recovery. Some even fear that the attacks could plunge the U.S. into a recession, with a ripple effect felt around the world.

Nonetheless, on the surface, Tuesday's events caused only minimal economic damage. The terrorist attacks in New York hit at a bastion of global capitalism, but the productive base of the United States has barely been scratched. U.S. economist Paul Krugman estimates that the actual damage from the attacks will amount to less than 0.1 percent of U.S. wealth. Thus, any prolonged economic downturn or recession is not the result of tangible damage--but rather of weakened expectations and dampened spirits.

On Wednesday I received an e-mail forward containing fabricated predictions of Nostradamus, a 16th century soothsayer. Regardless of what the e-mail said, I am not worried about the dismal prophecies of a deceased astrologer--I am more concerned about the predictions of the dismal science and the self-fulfilling prophecy of recession. For those unfamiliar with it, the premise of the self-fulfilling prophecy states that recessions largely happen because people expect them to happen. If consumers believe a recession is imminent, they tend to change their behavior and consumption patterns. The resulting changes in consumption are the actual cause of the recession because decreased consumer expenditures translate into decreased earnings for companies. Although the prophecy begins with consumers, the recession becomes self-fulfilling and affects almost all sectors of the economy, including technology.

In the United States, many people were already concerned about an economic downturn in the shadow of gloomy economic news: Scores of both old and new economy companies have missed revenue and profit targets, and the unemployment rate has jumped recently with massive layoffs by a broad range of companies including Lucent, AOL Time Warner, Citigroup, and Motorola.

In reaction to the downturn, consumer confidence in the U.S. was already on the decline. The University of Michigan's monthly poll on consumer confidence showed a steep drop, even before the terrorist attacks on Tuesday. The index fell to 83.5 percent in early September--its lowest rating since 1993. Consumer confidence was rated at 91.5 percent in August, only one month earlier. Since consumer confidence was already washing away, the recent attacks in the U.S. will likely only increase this trend.

Richard Curtin, who directs the University's survey team, said, "Given that the terrorist attack is likely to depress consumers confidence even further, the likelihood that the economic downturn could turn into a full fledged recession has grown substantially."

The terrorist attacks are predicted to reinforce uncertainty and diminished expectations with consumers. Bill Gross, the managing director of Pimco Bonds, describes the effect as the "bunker mentality" during which "we take fewer plane trips, fewer trips to the movies, [and] we tend to stay home as opposed to going out. What happens is that spending declines and a recession is accentuated."

The majority of Indian global technology companies target enterprises for their customers, not individual consumers. Initially, most will not be directly affected by the changing consumption patterns of the American people. Unfortunately, however, they cannot hide from the full effect of the self-fulfilling prophecy. Although they may be initially shielded from declining U.S. consumer confidence, any potential recession in their largest export market would eventually hurt them as well, especially since many of them have already taken a beating from the current downturn.

During recessions, companies have a tendency to slash expenditures and re-focus on their core offerings. This means many firms will reduce spending on research and development and put a freeze on investing in new products. The rewards of cost-consciousness and labor arbitrage initially brought new U.S. customers to many Indian services companies. However, recessions precipitate decreased budgets for technology expenditure, including outsourcing. If the self-fulfilling prophecy completely unfolds, Indian technology companies will inevitably feel its effects as U.S. enterprises decrease their spending on IT contracts.

Despite the pessimistic economic forecasts, there is good news on the horizon: technology has proven its worth. The web, e-mail, and mobile phones proved particularly useful in the aftermath of the terrorist attacks. Many of the top news sites in America, including The New York Times on the web and CNN.com, were so laden with the traffic of concerned readers that the sites were forced to reduce their home pages to fast-loading, simple text. E-mail communication and web sites helped families and friends track the safety of their loved ones, and sites, such as Helping.org, were revamped to coordinate relief for the tragedy. Calls made by mobile phones helped rescuers coordinate their efforts and allowed passengers on a doomed, hijacked plane to say one final "I love you" to their families.

In the long run, technology, like the human spirit, will survive and prevail. Technology has changed our lives, and it will continue to increase in pervasiveness and usefulness. The terrorist attacks did not diminish the long run upside for technology companies. But they will likely broaden and lengthen the technology downturn. To be among tomorrow's winners of Indian technology, companies must first learn to endure the scourge of the self-fulfilling prophecy.

About the author

David Burnett is the Founder of Technopreneurial.com and a Thomas J. Watson Fellow. He presently lives in Hong Kong, and his current research includes working on a book about the collected "lessons" of Asia's new breed of technopreneurs. The author can be reached via e-mail at david [at] technopreneurial.com.

For questions about this site, please contact david [at] technopreneurial.com.

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