US Debt Debate Prompts IT Spending Warning

Forrester is warning of a possible IT spending slowdown due to the ongoing US deficit debate

A Forrester Research analyst has warned of a possible negative impact to the global IT market over the next two years due to the ongoing debt-ceiling debate in Washington, DC.

In a 28 July blog post, Forrester analyst Andrew Bartels said the market research firm was prepared to publish a mid-year global IT spending forecast that was going to show 7.4 percent growth in the US IT market for this year and 10.4 percent in 2012.

Worldwide IT spending would jump 10.6 percent this year and 7.6 percent in 2012.

Economic Threats

Forrester’s projections were taking into account three threats to global economic growth, Bartels said: Failing to reach “a sensible resolution to raise the US debt ceiling and start on a path to lower budget deficits,” failure for European governments to solve the Greek debt crisis, and overreaction by China and India to inflation threats in those countries.

Over the past couple of weeks, developments seem to breaking in such a way as to alleviate much of these threats, he said. The European Union and European Central Bank came up with a plan to offer new financing to Greece while reducing the country’s debt levels, and in the United States, President Barack Obama and House Speaker John Boehner were close to coming up with a compromise deficit plan that would raise the debt ceiling through 2012 and reduce the deficit by $4 trillion (£2.5 trillion) over 10 years through a combination of budget cuts and tax increases.

All this was happening while such top-tier tech vendors as IBM, Microsoft and Oracle were unveiling quarterly financial numbers that showed solid growth.

“But then things fell apart,” Bartels wrote. “By Monday [July 25], the grand bargain was dead, House Republicans and Senate Democrats were scrambling to put together rival bills, and all the available options for resolving the debt ceiling increase would have negative impacts directly for the US economy, and indirectly on the global economy. And lower economic growth in turn translates to lower tech investment. So, we pulled our forecast, because it was clear the projections described above were too optimistic.

“Now, the question is how much to lower our forecast, and that will depend on what happens between now and 2 August.”

Three Scenarios

Bartels sees three scenarios rolling out, all of which will be damaging to the US economy and force Forrester to scale back projections on IT spending to different degrees.

The first is a failure to raise the debt ceiling, forcing the United States into default. Under this scenario, Forrester will lower its IT spending projections to 5.5 percent in the United States this year and 7 percent in 2012, with similar reductions worldwide. Bartels envisions a world where foreign investment in US bonds would fall and interest rates would rise for governmental agencies, businesses and consumers alike.

“In an already weak economy, it is not hard to see US real growth shrinking to 1 percent in Q3 and Q4 of 2011 as a result, with effects lasting into 2012,” he wrote.

The other two scenarios focus on Congress’ ability to extend the debt ceiling beyond 2012. Both the Republican-based bill sponsored by Boehner and the Democratic one being pushed by Senate Majority Leader Harry Reid call for about $2 trillion (£1.2 trillion) in spending cuts. However, Boehner’s also calls for a need to raise the debt ceiling again in 2012, while Reid’s would call for it to be raised enough to carry the country into 2013.

If Boehner’s bill is adopted, Forrester’s projections for the US IT market would be 6.5 to 7 percent growth this year and about 7 percent in 2012.

“Here, the damage would be threefold,” Bartels wrote. The scenarios he sees include “1) near-term cuts in US government spending that would hurt economic growth; 2) the potential for a downgrade in the US government’s credit rating, which would raise interest rates a bit, also slowing growth; and 3) a repeat of all the political [dysfunction] that characterized this episode, with the attendant financial market disturbances.”

Growth Forecast

Should Reid’s plan be passed, Forrester’s 2011 forecast for the US market will still be between 6.5 and 7 percent, but jumping to 8 percent next year. Global growth would be similar.

“I want to emphasise that we continue to see the tech market outperforming the economy in the US, and to a lesser degree globally,” he wrote. “As long as the US stays out of recession, we expect US tech investment will continue to grow twice as fast as US growth measured in current dollars (that is, without adjustment for inflation).”

US companies and government agencies may be cutting expenses and holding back on hiring, but both are still willing to spend on technology, he said.

Along with the federal debt debate, Bartels said another factor in Forrester’s numbers would be the Commerce Department’s estimates for second-quarter GDP (gross domestic product) and technology investment. Lower-than-expected numbers here could push the projections lower, while stronger numbers could raise them.

Forrester will release its global IT forecast numbers sometime during the first two weeks of August, he said.