Forrester has just published our fall forecast update for the US tech market ("2017 US Tech Budgets: The Outlook For Tech Spending Overall And By Industry"), and we are now projecting 5.1% growth for business and government spending on tech goods, services, and staff in 2017. That's a modest improvement from the 4.4% growth we are forecasting for 2016. That 2017 forecast assumes a continuation of the economic policies now in place under the Obama administration and the Republican Congress, and thus a Hilary Clinton election along with Republican control of at least the House of Representatives. Should Donald Trump win the election or alternatively the Democrats take control of both the House and the Senate, our forecast for the US tech market in 2017 would be quite different.
The three main forces driving this forecast are the moderate pace of real economic growth at around 2%, the strong demand for the Business Technologies (BT) that help firms win, serve, and retain customers, and the transition to cloud.
- Moderate but continuing economic growth with low inflation will support moderate growth in business and government tech spending. US consumer spending has become the main engine of US economic growth in 2016 and 2017, thanks to low unemployment, rising wages and household income, and low energy costs. On the other hand, the housing sector has slowed due to worries about higher interest rates from Federal Reserve tightening. The strong dollar continues to hurt US exports. Austerity at the Federal, state, and local government levels have held down government spending. And US businesses have been holding back on investment, in part to see what the outcome of the election will be. The combination of these forces is keeping US real GDP growth in the 1.5% to 2.5% range; inflation in the 1% to 2% range, and nominal GDP around 4%, setting a floor under US tech spending growth.
- BT spending will increase by almost 10%, while spending on traditional information technology (IT) will rise by 3%. In this economic environment, CIOs and their business partners are willing to spend more on the technologies that will help them grow revenues by attracting and retaining customers. Customer relationship management, eCommerce, marketing automation, customer service systems, and customer-related analytics will see growth of 10% or more, as will the related consulting and systems integration services, But back-office systems for supply chain management, purchasing, and human resource management will also benefit as changes in the front-office drive changes in the back office, On the other hand, spending will be weak for computer and communications systems, for telecomm services, and for traditional outsourcing services.
- Cloud cannibalizes traditional on-premises technology. The widening adoption of cloud technologies, whether in the form of cloud applications (Software-as-a-Service, or SaaS) or cloud platform services (the combination of Intrastructure as a Service or IaaS, and Platform as a Services or PaaS) is having big impacts on tech spending. US spending on cloud technologies is growing at 25% rates or more. But that growth is not yet showing up in the total tech market, because spending on on-premises licensed software or hardware systems is flat or shrinking. Not until cloud represents half or more of a tech category does that the strong growth show up in the top-line spending numbers. Some tech categories like CRM, ePurchasing, and Human Capital Management have already reached that tipping point, and as a result will see growth of 12% to 16%. But most tech categories are still at the cannibalization stage where cloud is eating into traditional technology spending but has not yet gained dominance.
In addition to the overall trends for US tech spending, we will see tech spending being stronger in some industries in 2017, and weaker in others, reflecting larger economic forces.
- High-tech, transportation, and construction will see the strongest growth in tech spending in 2017, at 6% or more. In high-tech, both hardware and software vendors are investing heavily to support their cloud initiatives. In transportation, strong demand and low energy costs are allowing airlines, trucking firms, railroads, and shipping companies to update systems, with a heavy focus on mobile and Internet-of-Things initiatives. Construction firms are looking past current softness in residential and commercial construction to improving demand as business and consumer confidence picks up.
- Oil and gas and chemicals will cut tech spending in 2017. While energy consumers are benefiting from low oil prices, energy producers are having to slash costs to adjust to much lower revenues. Chemical companies are seeing similar revenue pressure, despite benefiting from lower input costs.
- Other industries will tend to have tech budgets grow at 4% to 6% rates. For most industries, the mix of moderate growth in customer demand and low (though rising) energy costs will keep their tech budget growth close to the overall US rate of 5%.