November 29, 2006

US IT Spending Summary: Q3 2006

Surprise! The Tech Sector Will Avoid A 2007 Slump, Although Growth Will Slow From 2006

by Andrew Bartels

with Ellen Daley, Heidi Lo

Executive Summary (This is a document excerpt)

US GDP data for Q3 2006 continued the trend of moderate growth in tech investment, accompanied by clear evidence of the slowdown in the US economy that we have been expecting for the past year and a half. The Q3 2006 data from both US government and vendor sources showed a slight acceleration of growth in IT purchases, with business investment in IT equipment up 7% (from 6% in Q2), though vendors' US revenues were down to 1% growth. Real US GDP was up just 1.6% from Q2 (at annual rates), and nominal GDP rose 3.4% — half the average growth rates in the prior three quarters. Despite these indicators falling into line with our forecast for a sharp slowdown in IT purchases in 2007, we are raising our IT outlook for next year. Why? Because the Q3 economic slowdown was confined to the housing sector. Consumer spending did not slow down, and the falling gas prices at the pump since September will provide both a direct and psychological prop to this all-important sector. With US economy likely to grow by 2% to 2.5% in real terms and 4.5% to 5.5% in current dollars, we now expect IT investment will grow by 5% in 2007, with IT spending (with depreciation on capital investment) growing at 5% in 2007 after 6% growth in 2006.

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