October 27, 2013
The Congressional juveniles with their calls for big Federal budgets cuts, tolerance of Federal government shutdowns and flirting with Federal debt defaults have been put back into their corner, so it is time to assess how much damage they have done to the US tech market. In Forrester’s semi-annual US tech market update, we conclude that the Federal budget sequestration, the two-week Federal government shutdown, and the fallout from threats to not raise the Federal debt ceiling have shaved about two percentage points of growth from business and government spending on technology goods and services in 2013 (October 25, 2013, “Government Spending Brinksmanship Drags Down The 2013 US Tech Market Outlook – We Cut Our 2013 Spending Growth Estimate To 3.9% From 5.7%”).
Not surprisingly, government tech spending has borne the brunt of the slowdown, with Federal government buying down while state and local government tech purchases rose modestly. But since the effects of reduced Federal spending have flowed into the private sector, purchases of computer equipment have also slumped, as cautious CIOs dial back their spending on these easily deferred categories of the tech budget. Servers and PCs have been especially hard hit as alternatives like infrastructure-as-a-service (instead of buying servers) and tablets (as replacements for laptops) accentuated CIO caution. However, there is evidence that even corporate purchases of tablets have slowed in 2013 as the initial rush to put these new devices into the hands of employees has been way to a more measured adoption curve.
On the positive side, business (and to a lesser degree) government purchases of software have held up well, growing by 6.2% in 2013 after 6.1% growth in 2012. Software-as-a-service offerings continue to do well, especially for new collaborative software like smart process applications. Demand for business intelligence, analytics, and big data solutions have also done well. But licensed software for big ERP and CRM solutions has been weakening. With software spending holding up well, purchases of IT consulting and systems integration services to help firms choose and implement this software are also doing well. Lastly, with mobile applications gathering momentum, spending on communications equipment to support mobile apps and mobile devices has also been surprisingly strong in 2013, rising by 8.1%. On the other hand, spending on IT outsourcing and telecomm services is soft, with projected growth of 2.7% and 0.8%, respectively.
Looking ahead to 2014, we are projecting that US business and government purchases of IT goods and services will rise by 5.3%, supported by underlying economic strength from a revived housing sector, a modest improvement in employment and consumer spending, and improved export markets in Europe and Asia. Growth will again be led by software and IT consulting and systems integration spending, with a modest improvement in computer equipment. In that forecast, we are not assuming that Congress and the President can strike a budget deal that combines some long-term entitlement reform, tax reform and increased tax revenues, and a restoration of funding for infrastructure, research and development, defense, and other Federal discretionary spending that have been crippled by sequestration. That is probably too much to hope, though it would lead to even stronger economic and tech market growth. Still, we are assuming that the Federal government will get through the first quarter without a renewed Federal government shutdown or new threats not to raise the Federal debt ceiling. Should even that assumption prove too optimistic, then our 2014 forecast for the US tech market will once again have to be ratcheted down.