Economic Fears Dragging on Tech Spending

The technology industry's outlook for 2008 looks worse than it did just two months ago, when fears of a U.S. recession already were leading analysts to predict a slowdown in purchases of computers, software and tech services.

A report released Monday by Forrester Research Inc. says U.S. companies and government agencies are expected to increase their spending on information technology by just 2.8 percent this year. That is a substantial downward revision from the 4.6 percent growth that Forrester was predicting in December.

Typically, the analyst firm leaves its tech-spending forecasts alone for several months, because the economic trends that support such predictions tend not to change very quickly. However, Andrew Bartels, a Forrester vice president, said that in the past two months "there is a clearer sense that we're in or headed toward a recession."

Even if a recession does not materialize, fears that it will happen can be enough to make technology buyers more conservative.

Evidence from technology companies bears that out. In the past week, network equipment providers Cisco Systems Inc. and Alcatel-Lucent said they would be hurt by economic uncertainty this year. Last month the leading microprocessor maker, Intel Corp., spooked investors with a cautious forecast.

Forrester expects the worldwide tech market to grow a healthier 6 percent, but the December forecast had envisioned a 9 percent gain.

Another analyst firm, IDC, said Monday that negative economic indicators were leading it to readjust its 2008 predictions as well. IDC expects the worldwide information-technology market to grow 5 percent this year, down from the 5.5 to 6 percent range it provided in a December forecast. IDC expects U.S. growth of 4 percent.

The good news for technology companies and investors is that there is growth at all. In the 2001-02 downturn, information technology expenditures actually shrank. Neither Bartels nor Gartner Inc. analyst Ken McGee, who also wrote a recent report on the subject, sees evidence for that now.

Certain segments of the technology market could weather the current climate better than others. Bartels expects stronger results in software and technology consulting and outsourcing, because companies can turn to both for cost-saving measures in uncertain economic times.

In contrast, spending on computers and telecommunications networks has a longer-term payoff and is more likely to be postponed when times are tighter. IDC says the U.S. PC market should decline 5 percent this year, after growing 2 percent in 2007.