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.