This morning, the US Department of Commerce’s Bureau of Economic Analysis released preliminary data on the US Gross Domestic Product in Q 3 2009, which included data on business investment in computer equipment, software, and other IT equipment (principally communications equipment). The headline news is the 3.5% increase in real GDP in the US from Q2 2009 to Q3 2009 (at a seasonally adjusted annual rate). That is the first positive growth in US real GDP since Q2 2008, and the strongest since 2007. Some special factors, such as the cash-for-clunkers program in autos and the tax incentives for first time home buyers, contributed to this strong growth, so growth in coming quarters will be closer to 2% since these incentives have expired or are likely to do so. Still, the economic data does suggest that the recession is over.
That news is a positive for the tech market, because improving economic growth almost always leads to an upturn in the tech market one-to-two quarters later. However, it is the year-over-year growth rate in nominal (or current dollar) GDP that is the most important predictor of growth in year-over-year nominal growth in business IT investment, which of course corresponds most closely to the revenue growth that vendors sees. By this measure, nominal GDP in Q3 2009 was still down by 1.7% from the same quarter in 2008 – less of a decline than the 2.4% drop in Q2 2009, but still falling. Q4 2009 nominal will come close to being flat with the year before, and we expect positive year-over-year growth in 2010.
As we expected, Q3 2009 year-over-year growth in US business investment in computer equipment was down 16%, in software was down 9%, and in communications equipment was down 15%. These declines are similar to what we have seen in the vendor data for US revenues from the vendors who have reported so far (Accenture, EMC, Ericsson, IBM, Infosys, Microsoft, Motorola, Nokia/Siemens, Oracle, SAP, Tata Consultancy Solutions, Unisys, and Wipro) or projected for other large vendors. US revenues from computer equipment sales from these vendors in Q3 were down 15%, from communications equipment sales were down 11%, and from software sales to business were down 7%; revenues from IT consulting and outsourcing sales were up 0.6%, mostly due to positive growth in IT outsourcing. However, these declines were less than in Q2 2009. Looking ahead to Q4 2009, we expect that software and IT services vendors on average will be reporting positive year-over-year growth, that computer equipment vendors will narrow declines down to single digit rates, and that only communications equipment vendors will still see declines of 10% or more.
With these numbers in the bag, we think the stage is set for a strong tech recovery in 2010, even with the economy posting only moderate growth. “Strong” is a relative term – we define it as tech investment growing twice as fast as nominal GDP. With real GDP likely to grow by 2% to 3% in 2010 and inflation in the 1%-1.5% range, nominal GDP growth is likely to be 3%-4.5%. Double that growth rate, and we think 6%-9% is the likely range for US tech purchases in 2010. After the downturn of 2009, that will be positive news for tech vendors.