IT Industry on Cusp of Boom Before Recession Hit: Forrester

Recent upward revisions by the federal government in data surrounding IT spending for 2007 and 2008 indicated that the industry last year was on the verge of another boom until the economy collapsed in September, according to analyst firm Forrester Research.

However, the flip side to the federal Department of Commerce raising the amount that companies invested in IT during those two years means that the declines projected for 2009 are even steeper than initially estimated, Forrester analyst Andrew Bartels said in the quarterly global outlook report, released Sept. 29.

Bartels in June had projected a 5.1 percent decline in global IT spending in 2009. Due to the revised numbers for 2008, he raised that decline to 9.3 percent.

“Those [federal] revisions confirmed our position that a tech boom was starting to take shape in 2008, before being rudely interrupted by the September financial crisis,” Bartels wrote in the report. “The lingering effects of that financial crisis continued to hurt IT capital investments in Q2 2009, especially in computer equipment, network equipment, and licensed software, as companies stopped investing and hoarded cash.”

The revised federal numbers were not the only contributor to Forrester’s higher projected rate of decline in IT spending this year. Another factor has been the trend that the cutbacks in capital investment—which began last fall with computer and communications equipment—spilled over to licensed software in the first half of 2009.

However, nothing has made Forrester change from its previous prediction that the IT industry will start recovering from the downturn in the fourth quarter, and will see growth in 2010.

“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,” Bartels wrote in a blog post. “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 U.S. vendors reporting dollar revenues.”

The sharpest declines in IT capital spending this year will be in the first and second quarters. Business investments were down 13 percent in the first quarter from the year before, and 15 percent in the second quarter, according to Forrester.

“We expect Q3 2009 will be another weak quarter, with a decline of 13 [percent] from a strong Q3 2008,” Bartels wrote.

However, the decline won’t be as sharp as in the second quarter, leading Forrester to believe that Q2 was the bottom of the IT downturn. Bartels is predicting that by the fourth quarter, spending will be almost back to Q4 2008 levels, down 1 percent.

Computer purchases in the United States will continue to be low until Microsoft launches its Windows 7 operating system in October. Bartels said the new OS will help revive PC sales after two years of declines.

Communications equipment sales will hit bottom in the third quarter—or possible Q4—thanks to both enterprises and telecommunications firms cutting back on spending, while software sales also will continue to be under pressure.