The US Q2 2010 GDP Report: Good News For Tech, Not So Good For Employment

While taking in the latest US GDP report and its implications for the tech markets, I have been struck by a pattern of US business putting its money into technology instead of people. Part of the increased tech investment is replacement of old servers and PCs, but most investment has been in technologies to cut costs and improve efficiency. These purchases have been good news for the US tech market, which (as I predicted) is growing strongly. However, it is not so good for the overall economy. The lift to US economic growth from business IT investment is a positive, but the corporate reluctance to hire new employees is making consumers reluctant to spend. Moreover, much of the business investment in computer equipment is flowing overseas in the form of imports of these products, which is also hurting US GDP growth. So, the strong outlook for the tech market is paradoxically contributing to a less robust outlook for the US economy.

The US Department of Commerce released its preliminary report on US Gross Domestic Product in Q2 2010 last Friday, July 31, 2010, and today posted more detailed numbers on business investment in computer equipment and communications equipment. In addition to providing Q2 2010 data, there also were revisions in data for business investment in computer equipment, communications equipment, and software for 2007 to Q1 2010. So, let’s look at what the latest data is saying about the state of the US tech market.

The good news is that US business investment in technology is growing strongly and that the decline in 2009 was not as deep as the prior data had suggested. Business investment in computer equipment, communications equipment, and software rose by 12% in Q2 2010, following a 10% rise in Q1 2010. The strongest category was computers and peripheral equipment, with 31% year-over-year growth in Q2 2010, 21% in Q1 2010, and 13% growth in Q4 2009. Communications equipment investment grew by 7%, a slowdown from 10% growth in Q1. And software investment rose by 8%, the same growth rate as in Q1 2010 (see Table 1).

Table 1: US Business Investment In IT Equipment And Software Is Growing Strongly

*Excluding capitalized systems integration services

Source: US Department of Commerce, Bureau of Economic Analysis, National Economic Accounts, Gross Domestic Product, July 31, 2010 (http://www.bea.gov/national/index.htm)

In addition, revisions to the data on business investment in technology lowered the growth rate in 2008 (from 4% to 2%) but reduced the decline in 2009 (from -9% to -4%). The biggest change came in software, which changed from -8% in 2009 to a revised 0% growth that year. The decline in investment in computer equipment and peripherals was slightly smaller in 2009, down 12% instead of 14%. The main effect of this change will be to dampen the growth rates for software investment in 2010, due to a higher base of measurement from prior quarters in 2009 (see Table 2).

Table 2: Revisions to 2007-2009 IT Investment Data Lowered 2008 Growth, Reduced 2009 Decline

*“Computers” excludes capitalized systems integration services

Source: US Department of Commerce, Bureau of Economic Analysis, National Economic Accounts, Gross Domestic Product, July 31, 2010 (http://www.bea.gov/national/index.htm)

The not-so-good news came in the rest of the GDP report. While real GDP grew by 2.4% (a little less than our assumption of 2.8% growth in our July 21 report on the US and global IT market), personal consumption (which makes up about two-thirds of GDP) grew by just 1.6%, as continued high unemployment kept consumers cautious in their spending. Strong growth in business fixed investment (17% annualized growth), residential investment (28%), and federal government spending (9.2%) accounted for the strong performance and helped push real GDP growth higher than growth in consumer spending. However, the $50 billion rise in business fixed investment in equipment (at seasonally adjusted annual rates adjusted for inflation) from Q1 2010 to Q2 2010 was partly offset by a rise in imports of capital goods, which caused net exports of goods to drop by $89 billion (in similar terms). Moreover, much of the positive lift from government spending will fade by Q4 2010 as the economic stimulus program comes to an end, and recent weakening in home sales and housing starts suggests residential investment will not provide as much of a lift in coming quarters. So, continued economic growth will depend on consumers continuing to make or increasing their purchases and businesses continuing to invest in equipment and software. 

I remain cautiously optimistic that the US economy will continue to grow (albeit slowly) and that businesses will continue to invest in IT goods at much faster rates than the overall economy is growing. I will wait to update my US tech forecasts until I have more complete data from other sources; however, I expect any changes to my July 2010 forecasts will be minor. In the meantime, I will presenting my current 2010 data for US information and communications technology (ICT) purchases by industry and firm size (along with data on asset-intensive industries that are the best targets for Smart Computing solutions) in a Forrester Teleconference on August 31, 2010, on  "Best Industries For ICT And Smart Computing Solutions."

Still, I would be a lot happier if unemployment was falling more rapidly, consumer spending was strong, and businesses were more inclined to hire new employees and invest in technology for growth, rather than use technology simply to cut costs. That might happen naturally, but it would be more certain if there were renewed federal stimulus spending coupled with credible plans to reduce Federal budget deficits in the long run.