Forrester has just published our forecast for the 2014-2015 global tech market (January 2, 2014, “A Better But Still Subpar Global Tech Market In 2014 And 2015”), and we are predicting that business and government purchases of information technologies (IT) will grow by 6.2% in US dollars in 2014, and by 5.5% in exchange-rate-adjusted or local currency terms. (Note that this data includes purchases of computer equipment, communications equipment, software, IT consulting and systems integration services, and IT outsourcing services, but does not include purchases of telecommunications services.) The US dollar growth rate will be distinctly better than the 1.6% growth in US dollars in 2013, though constant currency growth will be only somewhat better than the 4.3% growth in 2013. Still, the global tech market won’t see strong growth until 2015, and even then the 8.1% US dollar and 6.9% local currency growth rates will be well below the double-digit growth rates of the late 1990s and 2000 era.
Three interconnected and reinforcing themes will define the global tech market this year:
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.
The US Bureau of Economic Analysis released its preliminary report on second quarter 2013 US GDP, along with both major revisions to US economic data over the past 50 years, and minor revisions to the data on US business investment in information technology goods and services. Here are my key takeaways from the report, and its implications for the US tech market.
US real GDP growth in Q2 2013 came in better than expected. The 1.7% growth at an annual rate from Q1 2013 was in line with our projection of 1.9%, but better than what many economists had been forecasting. Growth rates in Q4 2012 and Q1 2013 were revised down to 0.1% and 1.1%, respectively, from the earlier 0.4% and 2.5%. These revisions indicate that the end of the payroll tax reductions, the higher tax rates for high-income people, and the Federal budget cuts from sequester did take a toll on economic growth, with government consumption declining in Q4 2012, Q1 2013, and Q2 2013, and business investment in factories and offices falling in Q1 2013. But consumer spending has been solid, with growth of 1.8% in Q2 2013, 2.3% in Q1 2013, and 1.7% in Q2 2013. Business investment in equipment, which softened to just 1.6% growth in Q1 2013, improved to 6.8% growth in Q2 2013. And housing continues to be a growth engine for the US economy, with double digit growth rates in residential investment in the past four quarters, and improving home prices boosting consumer confidence and spending.
At the half mark through 2013, both the global and the European tech markets have pockets of strength and other pockets of weakness, both by product and by geography. Forrester's mid-2013 global tech market update (July 12, 2013, “A Mixed Outlook For The Global Tech Market In 2013 And 2014 –The US Market And Software Buying Will Be The Drivers Of 2.3% Growth This Year And 5.4% Growth Next Year”) shows the US market for business and government purchases of information technology goods and services doing relatively well, along with tech markets in Latin America and Eastern Europe/Middle East/Africa and parts of Asia Pacific. However, the tech market in Western and Central Europe will post negative growth and those in Japan, Canada, Australia, and India will grow at a moderate pace. Measured in US dollars, growth will be subdued at 2.3% in 2013, thanks to the strong dollar, and revenues of US tech vendors will suffer as a result. However, in local currency terms, growth will more respectable, at 4.6%. Software -- especially for analytical and collaborative applications and for software-as-a-service products -- continue to be a bright spot, with 3.3% dollar growth and 5.7% in local currency-terms. Apart from enterprise purchases of tablets, hardware -- both computer equipment and communications equipment -- will be weak. IT services will be mixed, with slightly stronger demand for IT consulting and systems integration services than for IT outsourcing and hardware maintenance.
Well, it looks like the folks in Washington have done it. The device, called "sequestration," that imposes mandatory across-the-board cuts in Federal defense and non-defense spending is actually going into effect. That mechanism was created back in 2011 at the time of the US debt ceiling crisis as an outcome so terrible that it would force Republicans and Democrats to find a compromise that starts reducing the US Federal deficit. Instead, it has itself become the compromise between a Republican plan that would impose all of the planned $85 billion in budget cuts in the current fiscal year on non-defense spending, and an Obama proposal for $85 billion in tax increases, future cuts in entitlement spending, and selected defense and non-defense cuts. Republicans would rather see actual cuts in current US spending, even if that cuts spending on defense, their favorite category of Federal spending, rather than support any increase in taxes. And Democrats would rather see cuts in non-defense discretionary spending rather than in Social Security or Medicare, even if that means many of their favorite Federal programs will face cuts.
The 2013 New Year has begun with the removal from the global tech market outlook of one risk, that of the US economy going over the fiscal cliff. On New Year's day, the US House of Representatives followed the lead of the US Senate and passed a bill that extends existing tax rates for households with $450,000 or less in income, extends unemployment insurance benefits for 2 million Americans, and renews tax credits for child care, college tuition, and renewable energy production, as well as delaying for two months the automatic spending cuts. While it also allowed Social Security payroll taxes to rise by 2 percentage points — thereby raising the tax burden on poor and middle class people — and did not increase the federal debt ceiling or address entitlement spending, the last-minute compromise does mean that the US tech market no longer has to worry, for now, about big increases in taxes and cuts in spending pushing the US economy into recession.
The 2012 US election is now over, and the results were about what I expected based on the polls going in: Barack Obama reelected President (although with a wider margin of victory in the popular vote and electoral college than many had predicted); the Democrats retaining control of the Senate, with a slightly higher majority; and the Republicans holding their majority in the House. The blog I wrote in September on "What An Obama Reelection Would Mean For The US Tech Market Outlook" now becomes the one to focus on. With the balance of political power in Washington now settled for the next two years, those of us who track the tech market will now be awaiting answers to four key post-election questions:
Like many others in the New York region, I am writing this in a cold, mostly power-less house, without landline telephone or Internet connections. Thanks to the foresight and generosity of a neighbor with a generator, we have an extension cord that is powering the refrigerator and one light, plus charging of various iPhones, iPads, and PCs. With a gas range for cooking and intact house, we are basically engaged in high-class camping, with both the pleasures and discomforts that entails.
Right now, my only electronic connection to the outside world is through my iPhone, which did provide email through the storm, though cell voice service went missing for 36 hours after Sandy hit. I am writing this on my laptop, which doesn’t have Internet access, because I refuse to write an article like this on the keypad of an iPhone. (Yes, I know, I should have bought the iPad with 3G, but do I really need to spend $600 just for that?) Once I get this written, I will head to the nearby Starbucks and use their Wi-Fi to post this blog.
What this experience has reinforced for me are four lessons:
Haven't we seen this show before? Like last year? Once again, Europe wrestles with and is again losing against its debt crisis. Once again, after some promising growth in late 2011, the US economy is showing signs of losing steam. Once again, China and India are flashing distress signals. And once again, John Boehner and the Congressional Republicans are threatening to refuse to raise the US debt ceiling unless US Federal spending is cut sharply.
Last year, the mid-year economic troubles did take their toll on tech purchases in the third and four quarters of 2011, but a last-minute resolution to the US debt ceiling issue, the European Central Bank's aggressive lending to banks so they could buy Italian and Spanish government debt, and some strength in US consumer spending, Germany's surprisingly strong growth, and continued growth in China revived global economic growth in Q4 2011 and into Q1 2012. Much depends on whether this pattern of slump and revival will recur again in 2012. My bet is that we will in fact see the same pattern.
So, let's look at the economic evidence, and then the tech market evidence.
US economy slows but continues to grow. In the US, the US Bureau of Economic Analysis on May 31 revised down Q1 2o12 real GDP growth to 1.9% from 2.1% in the preliminary report, and on June 1 the US Bureau of Labor Statistics reported that a disappointing 69,000 increase in payroll employment in May, the second month of sub-100,000 job growth. On a more positive note, US retailers and auto makers reported good sales growth in May, while gas prices at the pump continued to fall from peaks earlier. My take is that we will see real GDP growth in the 1.5% to 2% range in the remainder of 2012, down from my earlier assumption of 2% to 2.5% growth.
While I am still relatively bullish on the 2012 tech market outlook for the US (see our April 2, 2012, "US Tech Market Outlook For 2012 To 2013" report), I have to say that the data we got on the US economy and on the US tech market was a bit softer than I expected. US real GDP growth came in at 2.2%, a bit lower than my expectation of 2.5%. On the positive side, consumer spending rose by 2.9% in real terms, and residential construction continued to improve. On the negative side, business investment in structures was weak, and government spending fell at both the federal and state and local levels. More to the point, business investment in computer equipment and communications equipment fell from Q4 2011 levels, though computer equipment investment still was almost 8% higher than levels a year ago. Software investment, though, was up strongly — by 8.2% at an annualized rate from Q4 2011 and by 8.4% from Q1 2011.