While I am still relatively bullish on the 2012 tech market outlook for the US (see our April 2, 2012, "US Tech Market Outlook For 2012 To 2013" report), I have to say that the data we got on the US economy and on the US tech market was a bit softer than I expected. US real GDP growth came in at 2.2%, a bit lower than my expectation of 2.5%. On the positive side, consumer spending rose by 2.9% in real terms, and residential construction continued to improve. On the negative side, business investment in structures was weak, and government spending fell at both the federal and state and local levels.  More to the point, business investment in computer equipment and communications equipment fell from Q4 2011 levels, though computer equipment investment still was almost 8% higher than levels a year ago. Software investment, though, was up strongly — by 8.2% at an annualized rate from Q4 2011 and by 8.4% from Q1 2011. 

That pattern of strong software but weak computer and communications equipment purchases also showed up in the vendor data from those tech vendors that have reported so far — about half the 50 leading tech vendors whose revenues we track each quarter, including Accenture, Alcatel-Lucent, Apple, Atos, EMC, Ericsson, IBM, Infosys, Microsoft, Motorola Solutions, Nokia Siemens Networks, Oracle, SAP, TCS, Unisys, and Wipro. So far (and with projections based on expected revenues for other vendors), it looks like computer equipment vendors in the group we track will report a decline of 1% in their collective US revenues from sales to businesses and governments; communications equipment vendors will see a 1% rise; and software vendors will see a 9% increase. IT services vendors will come in between the weak hardware demand and the strong software demand, with growth in US revenues around 5%. IT consulting and systems integration services will do a bit better than that; IT outsourcing will do a bit worse. 

Behind these numbers lie two cross-currents of tech buying behavior. On the one hand, CIOs and other tech buyers are being cautious in making capital investments in computer and communications equipment given the uncertain strength of the US economy. On the other hand, they are keen to invest in software that can improve their business operations and analytical capabilities. Caution in making capital investments also explains why application license sales for Oracle and SAP were relatively weak in Q1, while SaaS software growth has been much stronger. I still think the caution will ease up as CIOs find that their businesses are doing better than they expected, so Q2 to Q4 2012 tech market results should be better than those in Q1. However, I also expect the pattern of strong software and weaker hardware will persist for the rest of this year.