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Posted by Andrew Bartels on September 30, 2012
Earlier in 2012, I was fairly bullish about the US tech market, expecting growth of 7% to 7.5% for the near depending on whether or not telecommunications services was included (see April 24, 2012, "US Tech Market Outlook For 2012 And 2013 -- Improving Economic Prospects Create Upside Potential") . But economic growth has been weaker than I assumed, coming in at 1.3% in Q2 2012 compared to my expectation that real GDP would grow by around 2-1/2%. In addition, the US Bureau of Economic Analysis revised downward its estimates for growth in business investment in computer equipment, communications equipment, and software. These revisions eliminated the evidence for my thesis that the US was in a new cycle of tech innovation and investment that was causing tech investment to grow twice as fast as the economy. Instead, the revised data showed that tech investment was growing at about the same rate as the US economy in 2010 and 2011, not faster as earlier data had shown. Tech innovation is clearly going on, but at least in the official data tech investment has not responded in kind. So, with nominal GDP growth for 2012 shaping up to be about 4%, our tech market growth outlook for 2012 in our latest US tech market forecast report (see September 28, 2012, "US Tech Market Outlook Dims For 2012 And 2013") is about the same, that is to say, in the 4.5% to 5% range.
The reasons for this more cautious outlook are clear. As mentioned, US real GDP growth has been weak, with businesses and to a lesser degree consumers being concerned about the so-called "fiscal cliff" in early 2013, when Federal tax cuts from the Bush era are scheduled to expire and cuts of $100 billion each in Federal defense and non-defense are supposed to take effect based on the Congressional agreements that were part of last year's deal to raise the US Federal debt ceiling. The concern is that political gridlock will prevent actions to avoid these events -- which many economists think would push the US back into a recession -- as well as stymie a broader longer-term solution to US deficits. Meanwhile, the European economies continue to slip into recession, even though more aggressive action by the European Central Bank seems to have fended off the deeper risk of a euro break-up and a resulting major financial market crisis. China and India have also shown evidence of slowdowns in growth as well. With these uncertainties, it is not surprising that business and government purchases of technology have gotten softer as the 2012 progressed, with tech vendors also reporting for the second quarter of 2012 -- and projecting for the third quarter-- slow revenue growth.
Still, not all is gloom. Breaking down the tech sector by category, it becomes clear that the weakness is concentrated in communications equipment, traditional licensed software, and computer servers and Windows PCs. Communications equipment will decline by 6%, mainly because of cutbacks by telecommunications vendors and to a lesser degree reduced buying enterprises and governments. Computer equipment purchases will increase by 6%, though Apple is capturing a large part of that growth due to booming business purchases of tablets, mostly iPads. In software, SaaS vendors continue to do well, even as licensed software demand weakens, contributing to overall growth in software spending of 5.9%. And IT consulting services, IT outsourcing services, and even telecommunications services will see growth in the 6% to 7% range.
Indeed, I think there are grounds for optimism. While Europe will continue to be in a slump, the European Central Bank in particular and other European policy makers are starting to put in place policies like a pan-European bank deposit insurance and regulation system, Eurobonds, and central bank support for the bonds of Italy and Spain that could put a floor under the European economy and keep it from deteriorating further. The tepid response of the Chinese government to the emerging signs of slowing growth in China is probably due to the jockeying among the Chinese political elite as to the shape of the next ten-year Chinese government, but once that is settled the new leadership could take more decisive steps to restore growth. Similarly, the Indian government is showing some signs of taking more aggressive steps to address the structural rigidities that are constraining growth. In the US, consumer confidence has been on the rise, in part because US housing prices are showing signs of improvement and housing sales are picking up. And, with current political polls pointing towards a re-election of President Obama, a Democratic retention of the Senate (by a slim margin), and continued dominance of the House by the Republicans, the lack of a mandate for either party may well encourage both parties to find a compromise that will resolve the fiscal cliff problem. True, a lot could go wrong on any of these fronts, which is why caution is warranted. But enough could go right to make 2013 turn out better for the tech market than our cautious forecast of 5% growth next year.
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