US Q2 2011 GDP Report Is Bad News For The US Tech Sector, But With Some Silver Linings

The US Department of Commerce released preliminary Q2 2011 GDP data this morning (National Income and Product Accounts -- Gross Domestic Product: Second Quarter 2011 (Advance Estimate); Revised Estimates: 2003 through First Quarter 2011), and there was not much good news in the numbers.  First, US real GDP growth came in at a weaker than expected 1.3% (see Table 1).  Equally bad, prior quarters' growth was revised downward -- Q1 2011 down to 0.4% from 1.9% earlier, and Q4 2010 down to 2.3% from 3.1% earlier.  Given the negative impact of the deadlock on raising the US Federal debt ceiling -- even if a default is avoided at the last minute -- it is hard to see US real GDP growing faster than 2% in Q3 and Q4 2011, and very possibly not much more than 1.5%.

Table 1, US Real GDP Growth Rates, Before and After July 29, 2011 revisions

 

Real GDP, annualized growth rate from prior quarter

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Before July 2011 revision

-4.9%

-0.7%

1.6%

5.0%

3.7%

1.7%

2.6%

3.1%

1.9%

 

After July 2011 revision

-6.7%

-0.7%

1.7%

3.8%

3.9%

3.8%

2.5%

2.3%

0.4%

1.3%

Slightly offsetting this, inflation was higher than in earlier reports.  That means that nominal GDP growth -- which is the key variable that drives our tech market forecasts -- was not that different from what had been reported before, or what our assumptions had been (see Table 2).  However, with inflation heading down and the likely low rates in real GDP, nominal GDP growth in coming quarters is likely to be in the 3% to 3.5% range. 

Table 2, US Nominal GDP Growth Rates, Before and After July 29, 2011 Revisions

 


Nominal GDP, annualized growth rate from prior quarter  Q1 2009  Q2 2009  Q3 2009  Q4 2009  Q1 2010  Q2 2010  Q3 2010  Q4 2010  Q1 2011  Q2 2011
Before July 2011 revision -1.9% -3.0% -2.6% 0.6% 2.8% 3.9% 4.5% 4.2% 4.0%  
After July 2011 revision -2.7% -3.9% -3.3% 0.0% 2.8% 4.4% 4.9% 4.7% 4.1% 3.7%

The other bad news in the GDP report concerned business investment in information technology.  Here, there were substantial downward revisions in the numbers for 2009, 2010, and the first quarter of 2011, especially in software.  In short, government statisticians counted less business investment in IT than they had estimated earlier.  Total business investment was reduced by $40 billion to $56 billion each quarter since the end of 2009, with software investment reduced by $20 billion to $30 billion per quarter.  "Other" (which includes communications equipment, medical equipment, copiers, and instruments) was reduced by $16 billion to $22 billion (see Table 3). 

Table 3, Big Reductions In Government Data on Business Investment in IT

 


Revisions in US$ billions at seasonally adjusted annual levels  Q1 2009  Q2 2009  Q3 2009  Q4 2009  Q1 2010  Q2 2010  Q3 2010  Q4 2010  Q1 2011
Business Investment in Information Technology -$20 -$26 -$26 -$35 -$40 -$47 -$48 -$55 -$56
  Computers and Peripheral Equipment -$4 -$4 -$4 -$5 -$4 -$4 -$3 -$3 -$4
  Software -$3 -$5 -$7 -$12 -$20 -$25 -$27 -$30 -$31
  Other -$13 -$16 -$15 -$18 -$16 -$18 -$18 -$21 -$22

The impact of these downward revisions in levels did not make much different in growth rates for business investment in computers and peripherals or other.  But it did have a big and surprisingly negative impact on growth rates in business investment in software.  Instead of growing at 8% to 10% rates in 2010 and early 2011 as earlier numbers had showm, the revised numbers showed software investment growing at 1% to 2% rates in 2010 and 4% in Q1 2011 (see Table 4).

Table 4, Revised Data Shows Much Slower Growth in Business Investment in Software

 


Software investment, percent change from prior year

 Q1 2009  Q2 2009  Q3 2009  Q4 2009  Q1 2010  Q2 2010  Q3 2010  Q4 2010  Q1 2011  Q2 2011
Before July 2011 revision -2% -1% -1% 4% 8% 8% 10% 9% 8%  
After July 2011 revision -2% -2% -3% 1% 2% 1% 2% 2% 4% 6%

These numbers are surprising, and not at all in line with the growth rates in software vendor revenues.  Our suspiciion is that these probably reflect downward revisions in the software category that the Department of Commerce calls "own account" software, that is, software that companies build themselves using internal IT staff.  The other two categories --"Prepackaged" and "Custom" -- conform to the commercial software sold by tech vendors, and likely have been growing.  Certainly, the Census Bureau data on revenues of US software publishers and computer systems design and related services, which provides one of the data sources used by the Department of Commerce, shows strong growth in 2010 and Q1 2011 in these revenues.  We won't know for sure until next week, when the Department of Commerce releases more detail on software investment.  But my expectation is that the revised data for prepackaged and custom software will show much stronger growth than the numbers for total business investment in software suggest.

So, while the implications for the US tech sector from these numbers are generally bad, there are a few silver lnings to the clouds:

  • Computer equipment investment by business, while lower than earlier estimated, was still growing at double digit rates through Q2 2011.
  • Commercial software purchases were probably growing at 8% to 9%, with much of the reported slower growth in total business investment in software due to reduced volumes of internally built software. 
  • Nominal GDP, which more than real GDP is the key economic variable that drives tech investment, is likely to grow at 3% to 3.5% rates in the rest of 2011, down just one percentage point from growth rates earlier in the year.  That points to slower growth in tech investment, but nonetheless positive growth that will continue to be faster than growth in nominal GDP.