November 7, 2012
The 2012 US election is now over, and the results were about what I expected based on the polls going in: Barack Obama reelected President (although with a wider margin of victory in the popular vote and electoral college than many had predicted); the Democrats retaining control of the Senate, with a slightly higher majority; and the Republicans holding their majority in the House. The blog I wrote in September on "What An Obama Reelection Would Mean For The US Tech Market Outlook" now becomes the one to focus on. With the balance of political power in Washington now settled for the next two years, those of us who track the tech market will now be awaiting answers to four key post-election questions:
- Will Republicans compromise with Obama and the Democrats to resolve the “fiscal cliff?” The biggest issue here is the scheduled expiration of the Bush era tax cuts at the end of 2012. The second issue is the $100 billion in non-defense spending cuts and $100 billion in defense spending cuts due to occur at the start of 2013 as a result of the compromise that raised the federal debt ceiling in 2011. If both these events were to happen, the US economy would almost certainly slide back into recession, pulling down tech spending with it. Here, the key player is likely to be Representative and former Republican Vice Presidential candidate Paul Ryan, who has been leader of the Tea Party faction of the Republican House majority. President Obama seems to be willing to let all the Bush tax cuts expire unless the Republicans agree to retain those tax cuts for the middle class but let taxes on the rich revert to former levels. Will Ryan lead his troops to a death fight to extend all the tax cuts? Or will his exposure to the moderation shown by Romney towards the end of their campaign foster a willingness to compromise on a balanced deficit reduction program? In his victory remarks last night, Obama did extend an olive branch to the Republicans, putting deficit reduction and tax reform – two Republican priorities – first in his list of goals for his next term. If Obama and Ryan can strike a budget deal along the lines of the Simpson-Bowles proposal and get their parties to agree on a package of near-term stimulus, longer-term entitlement cuts, higher taxes on the wealthy, and tax simplification, the economy and the tech market will start the year with positive momentum.
- Will consumer confidence continue to improve and support stronger consumer demand? The consumer portion of the US economy showed signs of improvement in the third quarter of 2012, with total consumer spending growing at a 2% annual rate from Q2 and consumer spending on goods up by 4.4%. Behind this improvement has been rising consumer confidence, improving housing prices and home construction, and slowly growing employment. Will the election results support this positive trend as the middle class responds to continuity of existing policies or hurt it as the wealthy react to the prospect of higher taxes on their income by cutting their spending? If US consumers continue to increase their spending and home buying, that will keep the US economy on a positive growth path, which will in turn help US tech purchases.
- Will business leaders respond to stronger demand and step up tech investment, or will they keep their foot on the brakes because of worries about higher taxes and the fiscal cliff? After growing strongly from Q2 2011 to Q1 2012, business investment in structures and equipment slowed to 3.6% real growth in Q2 2012 and dropped at a 1.3% rate in Q3 2012. Business investment in computer equipment dropped by 7.2% on a year-over-basis, and growth in software investment slowed to 5.2% on the same basis – its slowest quarterly growth since Q1 2011. I think that uncertainty about the fiscal cliff and a possible recession caused this pull back, not business executive concerns about higher taxes on their incomes and their businesses if Obama were reelected. To the extent that worries about the fiscal cliff were the main cause, a resolution to that problem plus evidence of strengthening consumer demand should get business investment back on track. But will business executives instead respond to the election of a president that many strongly opposed by cutting back their investment in plant and equipment – including their investment in tech buying? My bet is that businesses will respond primarily to signals of stronger economic growth, not to worries about tax rates, and will increase their tech spending as evidence of continued growth emerges.
- Will the European debt crisis move back to center stage? News of Greek, Spanish, and Italian debt problems and austerity programs elsewhere in Europe moved off the front pages in the run-up to the election. But weak economic growth and potential debt defaults still persist on that side of the Atlantic and could take a continued toll on the US manufacturing and financial services sectors. Have European leaders put the worst of their problems behind them, or do new and more severe problems lie ahead? The evidence on this question is so far mixed, but signs of improving growth in the UK, Scandinavia, and Germany suggest that the worst may be over in Europe; although its economic growth will remain weak well into 2013.
Based on the answers to these questions, we will make the call toward the end of 2012 on whether to retain, raise, or lower our 2013 US tech market forecast (see September 28, 2012, "US Tech Market Outlook Dims for 2012 Ton 2013").