The Forrester/ITAA Tech Sector Index remained largely unchanged for Q2 2006, posting seven-tenths of a point gain to 122.4. Firm strength indices continued to recede due in part to vendor profits, which posted consecutive-quarter declines for the first time in the history of the quarterly index from Forrester Research, Inc. (Nasdaq: FORR) and the Information Technology Association of America (ITAA). Gains in six of the 11 underlying measures indicate short-term growth for the tech sector, but long-term downward trends may prevail.

“While the future outlook is mixed, we are encouraged by the upward trends in IT investment,” said Phillip J. Bond, president of ITAA. “CIOs’ confidence translated into future spending intentions and expectations for IT investment in Q3 came in above what was reported for Q2. Venture capital investment also grew in the second quarter, nearly matching that of Q2 2005. All of this spending led to an increase in IT employment — its highest point in three years.”

“As in previous quarters, the forward-looking measures predicted the following quarter’s health. With those indicators up for Q2, the third quarter is likely to bring additional positive news. However, this may be the last hurrah for the US tech sector for several quarters,” said Andrew Bartels, vice president, Forrester Research. “All four of our forward-looking indicators are likely to post declines in Q3, due in part to the weak US economic growth this past quarter. These factors are likely to weigh heavily on vendor profits, vendor revenues, and overall sector health for Q4 2006 and into 2007. We expect another fairly healthy quarter for the US tech sector in the third quarter, but a worsening outlook beyond that.”

Q2 2006 Results

While the gain for the Q2 Index was positive overall, the sector’s performance was weak. Disappointing technology imports and falling vendor profits tempered the positive gains in the Index, which is based on 11 measures of IT demand, IT supply, and the strength of US-based vendor financials and technology prices. The overall index score weighs all of the indicators evenly, and it uses a 2002 quarterly average of 100 as the baseline. Highlights on the indices’ performance include:

All Four Firm Strength Indicators Recede

Continuing last quarter’s downward trend, measures of the US-based vendor financials and technology prices fell across the board in Q2. The US technology stock index published by Dow Jones experienced the largest drop, leading the 2.6-point decline for the group. Although vendor profits receded at a slower rate than in Q1, it was an unexpected drop — vendor profits have not decreased in consecutive quarters since Forrester began tracking them in 2000. Prices of technology products dropped two-tenths of a point; in contrast, the overall sector saw its lowest level of deflation in nearly six years.

CIO Confidence Leads Growth In Demand Indices

Bullish spending expectations from CIOs combined with growth in Forrester’s third quarter outlook for business investments in IT led to a three-point gain in the component of the Index that tracks demand for tech products from the US. Foreign demand, as measured by US technology exports, also contributed to the increase.

  • CIO confidence in future spending and business conditions was the main driver, rising 9.9 points.
  • The outlook for business investment grew as the strong economic growth of the first quarter flowed through into higher IT purchase plans for the third quarter.
  • Vendor revenues from US customers were the only metric to fall, following a pattern of weakening results over the past four quarters.

Supply Indices Gain Across The Board

Measures of the overall health of IT services and product supply gained 1.9 points in Q2, with all three indicators rising.

  • VC investment continued its rebound after declining for consecutive quarters in 2005, representing more than $365 million in growth over the first half of 2006.
  • IT employment gained steadily, adding 38,900 tech sector jobs.
  • US technology imports, a key source of technology product inputs, rose in Q2 after showing a slowing growth rate for most of 2005 and an absolute decrease in imports in Q1 2006. However, the growth fell short of expectations, allowing fears of a slowdown to linger.

More information on the specific performance of each measure is available in the report, “Forrester/ITAA US Tech Sector Index: Q2 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