The Forrester/ITAA Tech Sector Index receded 2.9 points in Q1 2006 to 121.2, falling for the first time since Q1 2005. A substantial drop in US vendor profits and weakening US technology imports and exports led the decline in the quarterly index from Forrester Research, Inc. (Nasdaq: FORR) and the Information Technology Association of America (ITAA). Although the overall results were mixed, with a decrease in five of the 11 measures, gains in forward-looking indicators bode well for future sector growth.

“Despite the decline in the Index, the positive forward-looking measures — CIO confidence, forecasted business investment in IT, and venture capital (VC) funding — are good news for the health of the tech sector,” said Robert B. Laurence, president of ITAA. “We are very optimistic about the increase in VC investment, which after falling in consecutive quarters, grew close to $100 million over Q4. CIO confidence and technology investment have also translated into continued growth in IT employment.”

“Once again, the forward-looking components from last quarter predicted the health of the tech sector for the current quarter. In Q4 2005, CIO confidence, IT spending, and imports pointed to the correction we are experiencing now. With three of the four up for Q1 2006, we are likely to see an overall tech sector gain in Q2,” said Andrew Bartels, vice president, Forrester Research. “Additionally, we were not surprised that imports, the final forward-looking indicator, fell in Q1 as they have the first quarter every year for the past six years. However, we are concerned that a sustained decline in imports — a key source of technology product inputs —d could indicate a tightening in inventories as vendors prepare for a potential slowdown.”

Q1 2006 Results

The Index, based on 11 measures of IT demand, IT supply, and the strength of US-based vendor financials and technology prices, fell off a four-and-a-half-year high in Q1 2006. Although this was the first loss since Q1 2005, only five indices fell in Q1 2006, which is less than the 10 measures that fell the same time last year. All of the indices are weighed evenly in the overall index score, which uses a 2002 quarterly average of 100 as the baseline. Highlights of the indices’ performance include:

Profits Drag Down Firm Strength Indices

The US IT firm strength indices — measures of the US-based vendor financials and technology prices — fell a total of 7.7 points in Q1 2006. Declining prices of technology products were joined by lower vendor profits and revenues. The drop in prices was not unexpected, as prices have not posted a single gain since 1991. The slide in profits was a change, as profits have generally been rising for most of the past two years. After growing 30.2 points in Q4 2005, profits dropped back to earth, falling 34.8 points in Q1. The strong profits in Q4 2005 led to the rise in the US technology stock index published by Dow Jones, which was the strongest performing indicator for the quarter. With Q1 profits lower and the overall stock market hurting so far in Q2 2006, the tech stock index will almost certainly be down in the second quarter.

Demand Indices Strengthen Slightly

The growth in three of the four measures of demand for tech products from the US led to an increase of nine-tenths of a point for this component overall. US technology exports were the only measure to fall following three quarters of growth, including a three-year high reached last quarter.

  • CIO confidence in future spending and business conditions stabilized in Q1 2006, posting a 2.5-point gain. Although CIOs in general are feeling more optimistic about the future, the sentiment has yet to translate into concrete future spending plans.
  • Forrester’s outlook for business investment in IT continued to grow, as expectations for Q2 spending came in well above reported Q1 spending.
  • Vendor revenues from customers in the US also grew modestly in the quarter.

Supply Indices Fall With Imports

Declining imports of foreign goods led to a 1.3-point drop in the supply component of the Index, which measures the overall health of the IT services and product supply in the US. While VC investment and IT employment posted healthy gains, neither was enough to offset the fall in imports.

More information on the specific performance of each measure is available in the research, “Forrester/ITAA US Tech Sector Index: Q1 2006.” The methodology behind the Index can be found in the research, “Forrester/ITAA US Tech Sector Index: Methodology.” Both reports and the quarterly Index graphic are located at and

About ITAA

The Information Technology Association of America (ITAA) provides global public policy, business networking, and national leadership to promote the continued rapid growth of the IT industry. ITAA consists of over 325 corporate members throughout the US, and a global network of 70 countries’ IT associations. The Association plays the leading role in issues of IT industry concern including information security, taxes and finance policy, digital intellectual property protection, telecommunications competition, workforce and education, immigration, online privacy and consumer protection, government IT procurement, human resources and e-commerce policy. ITAA members range from the smallest IT start-ups to industry leaders in the Internet, software, IT services, ASP, digital content, systems integration, telecommunications, and enterprise solution fields. For more information visit