IT Spending Expected to Rebound

The vicious circle that has caused the U.S. economy and technology spending to stumble will not spiral out of control, but rather conditions should improve within a year, according to International Data Corp. (IDC).

“The tumbling NASDAQ triggered a vicious circle in which lower stock values dampened IT spending and contributed to a broader economic downturn that, in turn, has put further pressure on technology spending and share prices,” said Kevin White, a senior analyst with IDC’s Global IT Economic Outlook research program. “However, the fundamentals underpinning IT investment remain strong, and this factor, along with a rebound in the economy, will restore IT spending in 2002 and beyond.”

IDC expects U.S. IT spending growth to slow to 7 percent in 2001, down from 11 percent last year, and cautions it could fall as low as 5 percent if the economy continues to deteriorate. Hardware spending will bear the brunt of the downfall, as IDC forecasts its spending growth will fall from 9.6 percent in 2000 to -1 percent in 2001.

“Evidence suggests that software and services are more resistant to a downturn in the economy than hardware,” White said. “Hardware may be more vulnerable because of the cyclical nature of business investment and household spending on consumer durables.”

Two main factors will help curb the IT spending slowdown: the Internet and productivity building. “The long-term trends in e-commerce and Internet usage are strong,” White said. “The expansion of their use will benefit not only Internet companies and retailers but also hardware and software vendors whose products power the Internet. Most businesses realize that investments in technology pay for themselves by improving internal efficiency and expanding external opportunity.”

April’s CIO Magazine Tech Poll, done in partnership with yardeni.com, also confirms a decline in technology spending. The poll first reported a softening in IT spending in November 2000, and the downturn entered its fifth consecutive month in April.

Underscoring the slowing of current and projected growth in IT spending, the CIO Magazine poll predicts IT budgets will grow by 7 percent over the next 12 months, down from a 9 percent prediction in March. The poll also found that IT budgets grew an average 10 percent over the previous 12 months, down from the 14 percent March estimate.

Half of the respondents plan to increase spending on data networking and communications equipment during the next 12 months, down about 11 percentage points from the March response. Forty-five percent plan to increase spending on computer hardware, down from 51 percent in March. In April, 25 percent said they would increase spending on telecom equipment, down from 32 percent in March.

IT compensation costs (including salaries, benefits and bonuses excluding stock options), reportedly rose by an average 9 percent in the 12 months ending in April, unchanged from the previous month and down from 14 percent in October.

On average, the CIO panelists expect to purchase 19 percent of their materials, supplies and parts from the Internet, up from an estimated 14 percent over the past 12 months. Last August, they projected 24 percent of their revenues would come from Internet transactions over the next 12 months. This projection was cut more than half in the April poll.

“Weak profits” is the reason cited by 34 percent of the CIO respondents as the primary negative factor facing IT spending plans in 2001. Another 29 percent see “tight financial conditions” as the main problem. Twenty-one percent said that spending might be weakening because there is sufficient IT capacity.