The health of the US technology sector took a dip in Q1 2007, according to the Forrester/ITAA US Tech Sector Index. The latest quarterly index from Forrester Research (Nasdaq: FORR) and the Information Technology Association of America (ITAA) dropped 2.6 points to 125.1, the first decline in a year. Overall, the index remains four points higher than it was one year ago.

A substantial drop in foreign trade was the leading contributor to the decline in the index as US technology exports tumbled 5.8 points. The weak performance came across the board as overseas demand for computer equipment, communications equipment, semiconductors, magnetic and optical media, and software all fell. That mirrored a continuing decline in domestic demand for US tech product, which dropped six points in Q1, the third consecutive quarter in which demand has fallen. The drop in the index had been both expected and predicted: First quarter results are historically lower than other quarters and forward-looking indicators in last quarter’s index foreshadowed a downturn.

“The US tech sector is currently mirroring the slump of the US market after several quarters of doing well in spite of it,” said Forrester Research Analyst G. Oliver Young. “Overseas demand for US tech products has been propping up the financial performance of US vendors — until now. A continuing erosion in foreign demand would spell trouble for the US tech industry.”

Q1 2007 Results

The Forrester/ITAA US Tech Sector Index is based on 11 indices measuring IT demand, IT supply, and the financial strength of US-based vendors. All of the indices are weighted evenly in the overall index score, which uses a 2002 quarterly average of 100 as the baseline. In Q1, six of the 11 underlying measures showed declines for the quarter. Highlights include:

  • CIO confidence tumbled 16.4 points, a larger-than-expected decline.
  • IT vendors’ US revenues gained a scant 0.8 points year-over-year following strong annual gains of more than seven points each of the previous two years.
  • Venture capital (VC) investment and IT industry employment both scored gains: VC investment rose 2.1 points after dropping for two consecutive quarters while the US tech sector added 11,900 jobs, the highest level of employment since the close of 2002.

“While somewhat expected, the news is mixed for IT with some indicators down and employment up,” said ITAA President and CEO Phillip J. Bond. “The expected first-quarter slowdown in the US hurts the industry’s near-term outlook and underscores our reliance on trade. Meanwhile, increased venture investment is a positive for the longer-term.”

The report “Forrester/ITAA US Tech Sector Index: Q1 2007” is currently available to Forrester RoleView™ clients and can also be purchased directly on our Web site.