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U.S. IT to move out of recession in Q3 2009? Maybe.

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U.S. IT to move out of recession in Q3 2009? Maybe.

Chicago (IL) – Forrester Research has released one of the most comprehensive reports
on the state of the U.S. tech industry we have seen so far and the
overall tone is somewhat less negative than what we tend to hear these
days in economic news reports. While Forrester’s Andrew Bartels is
concerned about a “deepening recession” he also makes the case that
there is a good chance that the tech industry may go into a recovery
phase by mid-2009.  

If we follow economy news these days, it seems the economy is in a fee fall, with consumers cutting their spending and businesses looking for direction and preparing for the worst. There is no question any more that the U.S. economy has been in a recession for quite some time and the general question seems to be how deep this recession will be and how long it will last. 2009 appears to be a done deal already and we are currently listening to economists and market experts who are discussing the chances of a 2010 recovery in the press.

In the midst of all of this we discovered a comprehensive market analysis released by Forrester Research last week, which is focused on the tech industry and actually includes some optimistic notes. Forrester has been among the more optimistic market research firms anyway, but this new report is certainly off the beaten track.

Analyst Andrew Bartels said that the weakening of the U.S. tech market became evident in Q3 of this year with computer equipment purchases showing declines and growth of network equipment, software purchases, and IT consulting and outsourcing services slowing considerably. He estimates that U.S. tech purchases will drop to 4.1% growth in 2008 (previous estimates were as high as 5.4%), while the 2009 growth expectation is now 1.6% (down from as much as 10.0%). The note that 2009 may see positive growth is based on the fact that Forrester believes that the tech industry will begin its recovery phase in Q3 2009. Also, Bartels does not think that the overall downturn in tech will be as sharp for the industry as was the dotcom bust, which sent revenues in some segments down by 15-20%.

From the report: “Our U.S. tech market forecast now assumes that the 0.5% decline in US real GDP in Q3 2008 will accelerate in Q4 2008 and the first half of 2009 before a weak recovery starts in the second half. This projection is similar to that of other economic forecasters, such as the Organisation for Economic Co-operation and Development (OECD) and the economists polled on a regular basis by The Economist magazine. Equally important, prices will fall in Q4 2008 and Q1 2009 due to the sharp drop in oil and commodity prices. The result will be actual declines in nominal or inflation-adjusted GDP in Q4 2008 and Q1 2009.”

Specifically, Forrester believes that purchases of computer equipment will continue to fall in 2009 – by 3.1% in 2009, on top of the 0.4% decline recorded for 2008. Communications equipment growth will slow to 0.8% in 2009, software purchases to 3.4% and IT consulting to 2.2%, according to the market research firm. All three areas are expected to post mid to high single-digit growth for 2010.   

Bartels also gave several reasons why Forrester remains somewhat more optimistic on the economy and an early recovery. First, he noted that the drop in gasoline prices “represents the equivalent of $100 billion tax cut for consumers” (well, at least if we did not consider the rise in energy cost as a “tax increase” in the first place). Then there is a drop interest rates, still growing tech demand from major emerging markets (BRIC – Brazil, Russia, India, China) and the impact of an economic stimulus package, which is expected to bring investments into the public infrastructure, support for improved healthcare information systems, revenue sharing for state and local governments, spending on unemployment insurance, jobtraining, health benefits and education.
 
Of course, Forrester’s forecast may be wrong and even Bartels concedes this might be the case. And if he is wrong, he states that a “five to seven quarter recession is the most likely alternative” to his four quarter model. He estimates the likelihood of a seven quarter recession at 35% and explained that such a scenario would be caused by an “inadequate” stimulus package “with spreading recessions in European, Asian, and emerging markets feeding rising trade barriers.” In that case, Bartels believes “U.S. tech purchases would decline by as much as 5% in 2009, instead of the forecasted slowdowns but no annual decline in overall U.S. IT purchases.

For now, the market research firm told its customers not to panic – unless they are hardware manufacturers. Computer hardware is believed to be the only IT segment with declining revenues in 2009. To prepare for tougher times, Forrester recommends computer equipment makers to “focus on consolidation, green, and finance assistance.” Software vendors should offer flexible fees and make an effort to “share the pain” with their customers and IT consulting firms need to concentrate much more on industry and project expertise in 2009, Forrester said.