Stock Market Correction Unlikely to Affect IT Spending-For Now: Forrester

By Wayne Rash  |  Posted 2011-08-08

Stock Market Correction Unlikely to Affect IT Spending-For Now: Forrester

Between Aug. 3 and Aug. 8, the Dow Jones Industrial Average dropped more than a thousand points, prompting many investors and analysts to ponder what effect this will have on the IT industry growth for the rest of 2012.

Many market analysts predicted that the sharp declines in the Dow would continue for a day or two longer. This sounds pretty grim, especially if you have a lot of money in the stock market. But a huge drop in wealth on paper is just that-on paper.

The drop in the Dow initially was precipitated by uncertainty about the status of the European debt crisis and fears that Italy may become insolvent. Then came the Standard & Poor's Aug. 5 announcement that it was downgrading the United States' credit rating from AAA to AA-plus, which fueled more market panic on Aug. 8. This had the pundits running around claiming the sky is falling.

The sky isn't falling. A couple of days of bad news isn't the same thing as the U.S. economy failing, the beginning of a recession or even a sharp drop in IT product sales. In fact, some of the bad news, the issue with the U.S. credit rating, came from only one company that publishes ratings-out of several that do so. That one company, Standard & Poor's, has caught a lot of flack for being wrong before. This time Standard & Poor's based its credit rating on the company's directors' views of the current political situation rather than on the economy. S&P was apparently trying to prove it is somehow right in its guesses about the economy. Unfortunately, that's enough to panic investors.

According to Andrew Bartels, research analyst for Forrester Research, the prediction for continued slow growth in the IT industry hasn't changed. "A week's worth of events doesn't tell you what the economy is like," Bartels said. "There was already weak growth going on."

Bartels said that currently the tech sector is growing at about twice the rate of the U.S. GDP (Gross Domestic Product). Enterprises are investing in technology because that helps them become more efficient and, in turn, that helps raise profits, he said. Corporate profits in the U.S. on average are in the double digits, Bartels noted, and unless the U.S. slips back into a recession, he expects them to stay that way. He said there's a cycle at work, "Companies are using technology to improve profits and using profits to buy technology."

Bartels said that he thinks that the chances that the U.S. will enter another recession are slightly higher than they were before the events of last week, but, even then, he doesn't think a recession is around the corner, if it happens at all. He said that tech spending will stay strong unless the GDP drops into negative territory, creating a recession.

Stock Market Correction Unlikely to Affect IT Spending-For Now: Forrester Tech Spending Growing Faster Than the GDP

Bartels did note that while IT spending is growing faster than the GDP, it could be a lot better. For that to happen, he said, consumer confidence needs to start rising again, encouraging companies to hire more people. That, in turn, would increase the demand for products and services, and would eventually encourage more IT spending. Of course, it would also cause the GDP to rise.

The rich, of course, are different. The one area of solid growth in the consumer market is spending by the wealthy. He said that high-end retailers are growing quite a bit faster than mid-range retailers. This means that those high-end retailers will also spend more on IT than they might otherwise. However, Bartels did note that wealthy consumers are more likely to be affected by major changes in the stock market if those changes last long enough.

Right now, however, there's nothing to indicate that tech spending will be affected by a week's worth of turmoil. The Standard & Poor's change to the U.S. credit rating hasn't been followed by a change in interest rates, and other rating agencies haven't followed suit, suggesting that S&P is an outlier. The question is whether the sharp drop in the Dow Aug. 8 will be followed by even a modest recovery later in the week. If the Dow starts gaining ground as the week moves on, then all this stock market drama was just that-drama.

The bottom line is that while a series of economic burps may make news (not to mention some great buying opportunities), it does not define the broader economy. Tech buying depends on the overall economy and on the need by companies to improve efficiency and productivity.

What will take the wind out of the sails of the tech industry is something that has a broader effect on the economy in general, such as a major reduction in federal spending, a loss of confidence in the U.S. caused by more gridlock in Congress or a long-term failure to resolve the basic problems with the economy. One week on Wall Street, as bad as it was, won't do it alone. 


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