IT Sector Should Bottom Out in Q3, Forrester Says

Technology spending in the United States and worldwide will decline more steeply than anticipated, Forrester Research predicts in its quarterly IT economic report. However, the severe drop in spending in the first half of the year suggests that businesses will increase their IT investments in the second half as they see the recession beginning to ebb and a rebound on the horizon. Forrester expects the IT sector to bottom out in the third quarter, with spending increasing in the fourth quarter and into 2010.

The first half of 2009 was a brutal one for the IT sector in the United States and throughout the world, but that could translate into good things for later this year and into 2010, according to Forrester Research.

In a report issued June 29 titled "U.S. and Global IT Market Outlook: Q2 2009," Forrester analyst Andrew Bartels said the first six months of the year were worse for the technology market than Forrester had anticipated, and that will have a negative impact for the entire year.

However, Bartels said, he expects the horrible numbers for the first half of the year could mean a stronger rebound for the industry and earlier than expected, as businesses begin to spend the IT dollars that they held onto so tightly in the first two quarters. The IT sector should bottom out in the third quarter, he said, with growth resuming in the fourth quarter and 2010.

"We think businesses and governments overreacted to the U.S. and global recessions-in part because of fears that a broken financial system meant normal lending was not available-by cutting back too much on capital investment in Q4 2008, Q1 2009 and Q2 2009," Bartels said in the report. "They will restore tech purchasing levels as they realize that the recession is not as deep or as long-lasting as they feared."

Gartner predicts PC market growth in the fourth quarter of 2009. Click here to read more.

Still, those pullbacks on spending are forcing Forrester to revise downward its overall 2009 projections.

Worldwide, Forrester is now projecting that purchases of IT goods and services by businesses and governments for 2009 will drop by 10.6 percent over last year; Forrester at the beginning of the year had projected a 3 percent drop. In the United States, IT spending is projected to show a 5.1 percent decline, compared with the 3.1 percent decrease previously forecasted.

Just as Forrester analysts said in March, the key driver for the spending decline was the credit crunch driven by the disintegrating financial markets.

"Companies large and small have been shut out of credit markets; even those that still have access to bank loans, markets for commercial paper or corporate bonds often have had to pay much higher interest rates," Bartels said in the report. "U.S. businesses have been hoarding cash and cutting capital investment, with IT capital investment getting caught in the pullback."

He compared the U.S. market with that of Canada, where while the economy is in recession, the financial markets are still relatively healthy and businesses haven't cut back as much on IT investments. In the United States, spending on IT hardware and software fell 13.5 percent, while in Canada it stayed flat.

Hurt the most were IT hardware and networking sales, according to the report, though software and services also will see a decline in 2009. Only the outsourcing sector will not decline.

However, Bartels said he expects IT spending in 2010 to grow 8 percent, and is recommending that IT vendors get ready for growth.

"By Q4 2009, the signs that the U.S. economy has hit bottom and started to recover will be clear, and CIOs will dust off their investment plans and start spending to take advantage of the recovery," Bartels said in the report. "By 2010, the tech recovery will spread to other markets and gather strength, with the low base level of purchases in the first half of 2009 allowing many vendors to report double-digit growth rates in the first half of 2010."

He recommended that vendors increase their sales and marketing efforts, reinforce the idea that technology can be a driver for business and IT efficiency, and highlight success stories.

However, Bartels also cautioned in the report that there is a 25 percent chance that the recession will be deeper and last into 2010. Should that happen, U.S. IT purchases could fall by as much as 8 percent in 2009, and by another 3 to 4 percent in 2010.