Forrester: mild tech slowdown ahead

Quickly: Forrester predicts a technology slowdown lasting three to four quarters, driven by an expected mild recession.

Forrester uses its extensive primary research with consumers, large companies, and vendors to continually forecast tech spending and the health of the overall economy. Here's what we're seeing.

The financial services sector (investment banks, regional banks, local banks, mutual fund companies, hedge funds, securities firms, credit card issuers, etc.) represents about 18% of the US IT market. The Wall Street portion (Citibank, JP Morgan Chase, Bank of America,Lehman Brothers, Goldman Sachs, et al.) is approximately a third of that, or about 6% of total U.S. IT spending. The troubled firms (Lehman, Merrill, Bear Stearns, AIG, Fannie, Freddie) represent only 2% of IT spending -- this is the portion most in danger of being cut.

Some IT vendors focus on financial services, and could find their business mildly tightened. Tata Consultancy (TCS) gets 43% of its revenues from financial services; Infosys 34%; IBM 29% (but only 6% from US financial firms). So, these vendors –- plus software vendors that sell risk management software or trading systems -- could experience some delayed or canceled contracts.

That said, changing market conditions can stimulate certain parts of the tech economy. Some hardware, software, services, and outsourcing offerings save money. An example would be virtualization -- a consolidator of inefficient data centers. Also, the rigors of mergers and integration could also be drivers of new tech spending. Bank of America, Barclays, and JP Morgan have 36 months of intensive technology integration work ahead -- this will drive professional service, software, and to a lesser extent, hardware spending.

The biggest risk to the tech market comes, not from the Wall Street collapse, but from a collateral U.S. recession. Forrester expects a mild recession in the U.S. and Europe lasting through Q3 and Q4 of 2008, and Q1 of 2009. While tech spending grew 8% in the U.S. in 2007, we are forecasting tech purchases to be up 5% in 2008, and up 6% in 2009.