My colleagues at Forrester and I have been puzzling over the discrepancy between the wealth of attractive new mobile, cloud, and smart computing technologies in the market, and the relatively weak record of actual growth in tech spending that our tech market forecasting numbers show. Certainly, the recessions in Europe and weak economies in the US, Japan, China, India, Brazil and other emerging markets explain part of the weakness in tech buying. In addition, cloud computing’s impact on the timing of tech spending (reducing initial upfront capital purchases of owned hardware and software while increasing future subscription payments for use of these resources) means that spending that in the past would have occurred in current years has now been pushed into the future. Lastly, as a recent Economist article pointed out, business investment in general has been low compared to GDP and to cash distributed to shareholders this decade, as CEOs with stock option compensation have focused on meeting quarterly earnings-per-share targets instead of investing for the longer term (see Buttonwood, “The Profits Prophet,” The Economist, October 5, 2013). Still, even taking these factors into account, tech investment has been growing more slowly relative to economic activity than in past cycles of tech innovation and growth.
Relative to both Canada's economic growth and the US tech market, Canadian business and government purchases of information and communication technologies (ICT) has lagged since 2011. Spooked by European debt problems, uncertain growth prospects in its US and Asian export markets, and the strong Canadian dollar, business executives have been holding back on making tech investments. That pattern has continued in 2013, with our latest Canadian tech market report projecting growth of just 2.2% in Canadian ICT purchases in 2013 when measured in Canadian dollars (see October 25, 2013, “The Canadian Tech Market 2013 To 2014 – Sluggish Canadian Tech Market Will Accelerate In 2014”). Business and government purchases of computer equipment will be down 0.2% in 2013, purchases of communications equipment will rise by just 0.9%, and spending on IT outsourcing and telecommunications services will increase by 2.6% and 0.7%, respectively. The best tech sectors in a generally weak Canadian tech market will be software (with 5.8% growth) and IT consulting and systems integration services (with 3.6% growth).
The Congressional juveniles with their calls for big Federal budgets cuts, tolerance of Federal government shutdowns and flirting with Federal debt defaults have been put back into their corner, so it is time to assess how much damage they have done to the US tech market. In Forrester’s semi-annual US tech market update, we conclude that the Federal budget sequestration, the two-week Federal government shutdown, and the fallout from threats to not raise the Federal debt ceiling have shaved about two percentage points of growth from business and government spending on technology goods and services in 2013 (October 25, 2013, “Government Spending Brinksmanship Drags Down The 2013 US Tech Market Outlook – We Cut Our 2013 Spending Growth Estimate To 3.9% From 5.7%”).
Not surprisingly, government tech spending has borne the brunt of the slowdown, with Federal government buying down while state and local government tech purchases rose modestly. But since the effects of reduced Federal spending have flowed into the private sector, purchases of computer equipment have also slumped, as cautious CIOs dial back their spending on these easily deferred categories of the tech budget. Servers and PCs have been especially hard hit as alternatives like infrastructure-as-a-service (instead of buying servers) and tablets (as replacements for laptops) accentuated CIO caution. However, there is evidence that even corporate purchases of tablets have slowed in 2013 as the initial rush to put these new devices into the hands of employees has been way to a more measured adoption curve.
Two weeks after the Federal government shutdown and two days before the Federal government runs out of means to pay all its bills without additional Federal borrowing, the unthinkable development of a Federal debt default needs to be thought about. The responsibility for this situation lies squarely with the House Republicans, who have refused to bring to a vote a resolution to raise the debt ceiling without conditions. Moderate Senate Republicans and Senate Democrats have been working on a resolution that would raise the debt ceiling until January and re-open the Federal government at current, sequestration-reduced spending levels, in return for initiating negotiations between the White House, Democrats, and Republicans on longer-term deficit reduction plan and some minor adjustments to the Affordable Care Act. While this could well form the basis for a way out of this deadlock before midnight on Thursday, October 17, some House Republicans have already labeled it "a surrender" and vowed to oppose it. So, I think the risk of a Federal debt default is at 10% and rising.
Here we are a week into the Federal government shutdown and, as the Republicans and Fox News commentators like to say, the sky has not fallen. Nonetheless, in subtle ways, the shutdown is taking a toll on the economy. To pick one relatively small example, tech market analysts like myself who depend on data from the US Bureau of Economic Analysis, US Census Bureau, and the US Bureau of Labor Statistics are operating in the dark -- just take a look at their Websites, e.g., "Due to the lapse in government funding, www.bea.gov will be unavailable until further notice." More substantively, approximately 800,000 Federal employees are not being paid, Federal government purchases of goods and services have come to a standstill, Federal grants to states and local governments are on hold, and Federal government services ranging from disaster recovery, meat and drug inspections, medical research, public health, to National Parks are not available to citizens and businesses.