October 23, 2012
We are just at the start of the earnings releases on Q3 2012 vendor revenues and a week and a half from the first release of US GDP data on business technology investment in the quarter, but it is already clear that Q3 2012 will be a weak one in terms of tech market growth. IBM reported a 5% revenue decline its third quarter; Microsoft had an 8% decline in total revenues, and we estimate a 5% decline in its sales to business; and Tibco had a 3% drop in its revenues for its quarter ending August 31, 2012. Oracle's software revenues for its quarter for the same period rose by 2% (with license revenues down 1%); and Accenture saw its revenues for the same period rise by just 2%. While there have been some positives — Tata Consultancy Systems' revenues were up by 13%, and Adobe had a 7% increase in its revenues — weakness has been the dominant story so far.
Is this the start of a downward trend in the tech market? I don't think so. Yes, there continues to be weakness in Europe, with most countries there in or close to recession. But the US economy seems to be gathering strength, with consumer confidence on the rise, retail sales increasing, and the housing sector improving. China, which had been showing signs of slowing growth, also appears to be picking up. So, the economic fundamentals are pointing toward an improving tech sector in Q4 2012 and 2013.
I think the main driver behind the Q3 2012 weakness has been CEO and CIO worries that the US will fall off the fiscal cliff, with continued political gridlock leading to an expiration of the Bush era tax cuts by the end of the year, mandated cuts in both defense and non-defense spending in early 2013, and a potential US debt default if the federal debt ceiling is not raised in March. These are real risks, especially with the Republicans likely to retain control of the House, the Democrats looking to hold the Senate, and a Presidential race that could go either way. But I think the election results are more likely to lead to compromise rather than renewed stalemate. Neither party is likely to get a resounding mandate. Each will have some positive results they can point to as evidence of public support, but each will also have defeats. While diehard partisans in both parties will resist compromises, the threat of an economic recession will be a powerful incentive for a majority drawn from both parties to agree to extend most but not all of the tax cuts, keep some but not all of the spending cuts, and begin a process for dealing with entitlement reforms. But that cannot happen until the election is held, the dust settles, and both parties come to terms with the election results.
So tech decision-makers will sit on the fence for the next 4-6 weeks, wait to see how the election turns out, and look to see signs that political leaders will pull the US back from the fiscal cliff. When that happens, tech purchasing will start to pick up, responding to the more positive trends in the US economy.