As Expected, Data on Q3 2009 US IT Market Showing Continued Decline, But With Signs of Nearing Bottom

This morning, the US Department of Commerce’s Bureau of Economic Analysis released preliminary data on the US Gross Domestic Product in Q 3 2009, which included data on business investment in computer equipment, software, and other IT equipment (principally communications equipment).  The headline news is the 3.5% increase in real GDP in the US from Q2 2009 to Q3 2009 (at a seasonally adjusted annual rate).  That is the first positive growth in US real GDP since Q2 2008, and the strongest since 2007.  Some special factors, such as the cash-for-clunkers program in autos and the tax incentives for first time home buyers, contributed to this strong growth, so growth in coming quarters will be closer to 2% since these incentives have expired or are likely to do so.  Still, the economic data does suggest that the recession is over. 

That news is a positive for the tech market, because improving economic growth almost always leads to an upturn in the tech market one-to-two quarters later.  However, it is the year-over-year growth rate in nominal (or current dollar) GDP that is the most important predictor of growth in year-over-year nominal growth in business IT investment, which of course corresponds most closely to the revenue growth that vendors sees.  By this measure, nominal GDP in Q3 2009 was still down by 1.7% from the same quarter in 2008 – less of a decline than the 2.4% drop in Q2 2009, but still falling.  Q4 2009 nominal will come close to being flat with the year before, and we expect positive year-over-year growth in 2010.

As we expected, Q3 2009 year-over-year growth in US business investment in computer equipment was down 16%, in software was down 9%, and in communications equipment was down 15%.  These declines are similar to what we have seen in the vendor data for US revenues from the vendors who have reported so far (Accenture, EMC, Ericsson, IBM, Infosys, Microsoft, Motorola, Nokia/Siemens, Oracle, SAP, Tata Consultancy Solutions, Unisys, and Wipro) or projected for other large vendors.  US revenues from computer equipment sales from these vendors in Q3 were down 15%, from communications equipment sales were down 11%, and from software sales to business were down 7%; revenues from IT consulting and outsourcing sales were up 0.6%, mostly due to positive growth in IT outsourcing.  However, these declines were less than in Q2 2009. Looking ahead to Q4 2009, we expect that software and IT services vendors on average will be reporting positive year-over-year growth, that computer equipment vendors will narrow declines down to single digit rates, and that only communications equipment vendors will still see declines of 10% or more. 

With these numbers in the bag, we think the stage is set for a strong tech recovery in 2010, even with the economy posting only moderate growth.  “Strong” is a relative term – we define it as tech investment growing twice as fast as nominal GDP.  With real GDP likely to grow by 2% to 3% in 2010 and inflation in the 1%-1.5% range, nominal GDP growth is likely to be 3%-4.5%.  Double that growth rate, and we think 6%-9% is the likely range for US tech purchases in 2010.  After the downturn of 2009, that will be positive news for tech vendors. 

Forrester's Updated IT Market Forecast Shows Worse 2009, But Still Positive Outlook for 2010

In our latest US and Global IT market forecast (http://www.forrester.com/go?docid=53305), Forrester stays steady with our June 2009 projections that the US tech market will start to recover from the downturn in Q4 2009, with the global tech market improving in 2010.  However, the 2009 growth rate now shows a bigger decline than our earlier forecasts, for two reasons.  First, cutbacks in capital investment, which had earlier been confined to computer and communications equipment, spread in the first half of 2009 to licensed software, causing big declines in this category of tech purchases.  Second, upward revisions to US IT investment data in 2007 and 2008 by the US Department of Commerce raised the base periods for measuring 2009 growth, making the 2009 declines even greater than before.  Thus, we now project a -9.3% decline in US tech purchases in 2009, compared to a 5.1% decline in our June forecast.  But those revisions confirmed our position that a tech boom was starting to take shape in 2008, before being rudely interrupted by the September financial.  The weak results in early 2009 also mean that the market will hit bottom sooner, setting a low base for year-over-year growth starting in Q4 2009 and into 2010. 

The story is the same for the global outlook.  2009 now looks worse than our previous forecasts, but 2010 still looks like a year of solid recovery.  One factor that will help reported vendor results (especially for US vendors) is the decline in the value of the US dollar against major currencies since March of 2009.  The value of the dollar is now about where it was a year ago, so vendors will be able to report Q4 2009 revenues in US dollars that will be better than their currency-adjusted numbers. 

As vendors start to report their calendar Q3 2009 revenues in coming weeks, revenue growth will still be negative in most cases.  But the declines will be smaller than in Q1 and Q2 2009.  And calendar Q4 2009 revenues should be close to even with year-earlier levels, and in many cases will be positive, especially for US vendors reporting dollar revenues.  So, with calendar QQ3 just one day from being over, it is safe to say that the worst of the tech decline is over, with prospects for 2010 looking positive.  Vendors need to look beyond the downturn and get prepared for a strong tech recovery in and 2010.