In our last US tech market forecast (“US Tech Market Outlook For 2021: After The Election — How Politics, The Pandemic, And The Economy Will Shape Industry Tech Budgets“), we projected that US business and government spending on tech goods, services, and staff would be weak, with a 0.4% decrease. At that time, the Republicans had a slim majority in the US Senate, with the prospect of adding to that majority when runoff elections for two Georgia Senate seats occurred on January 7, 2021. Our forecast assumed that the Republican-controlled Senate would resist calls for additional federal government spending to reverse the effects of the COVID-19 pandemic, keeping both the US economy and the US tech market on a slow and tepid recovery path from the 2020 recession.
Politically, the election of Democrats Jon Ossoff and Rev. Raphael Warnock to the US Senate means that Democrats will now have narrow but effective control of the 50-50 Senate through soon-to-be Vice President Kamala Harris’ tie-breaking vote. Combined with Democratic control of the House, this result has three policy implications: 1) greatly increased probability of an additional economic stimulus bill that would include aid to state and local governments, more support for small businesses, more infrastructure spending, and increased unemployment and/or cash support for families; 2) an expedited process for approving Biden cabinet appointments and putting their agencies to work on new agendas; and 3) an emphasis on relatively moderate (e.g., no Medicare for All) policies that can attract at least some Republican support.
Here are the economic implications of the shift to a Democratic-controlled Senate and House:
- Stronger economic growth, especially from government, small business, and consumer spending. The $900 billion emergency relief bill passed in December 2020 was essential to keep the economy from falling back into a recession. But most economists feel that it was not enough to support sustained growth. Increased aid for state and local governments will help them balance their budgets without cuts in staff and services. Targeted support for small businesses will help those still hanging on (after hundreds of thousands have failed) to stay afloat until COVID-19 vaccines allow a return to more normal business. A $2,000 payment to lower- and middle-income people (which both President Trump and Senator Bernie Sanders advocated) will pump 2.5 times more money into household budgets than the $600 payment in the current relief bill. As we have written earlier, the state and local government and the small business sectors are the most vulnerable parts of the US economy, along with the low-income families (see the Forecasting In Uncertainty: Small Businesses And State And Local Governments Will Be The Prime Vectors Of Tech Market Recession blog post).
- The potential for higher interest rates and (in the longer run) higher taxes, which could deter business and residential investment. The Federal Reserve has been extraordinarily aggressive in its monetary policy to address the pandemic recession, in part to fill the gap of an inadequate fiscal policy response. But with the Biden administration and Democratic Congress pursuing more federal spending, the Fed could shift toward a more neutral monetary policy in order to stave off future inflation. Such a shift could raise interest rates, which would hurt interest-sensitive industries such as housing, construction, and commercial real estate. In addition, businesses and wealthy households could worry about higher taxes and limit their spending in response. To offset, Democrats are likely to turn to big increases in infrastructure spending, which would provide an offsetting boost to construction companies and manufacturers of goods and materials used in infrastructure projects.
- A faster recovery for the hard-hit travel and entertainment industries. The sooner the US reaches an 80% or greater inoculation rate for the US population, the quicker Americans will return to restaurants, travel destinations, entertainment venues, and personal services providers. With the vaccine rollout accelerating, investor and consumer confidence could accelerate more broadly.
Applying this thinking to the US tech market, Forrester sees the following implications:
- Faster tech market growth in 2021. Stronger economic growth will cause US tech spending to grow in 2021 by somewhere between 2% and 5%. We will not be able to make a more precise prediction until Q4 2020 data becomes available in late January on US GDP and business investment in software and hardware.
- Increased demand for software and communications equipment. With a stronger economy bringing greater revenue growth for many US companies, spending on software products that help them capture and handle that increased demand is likely. An expected increase in federal infrastructure investment and support for state and local governments is likely to lead to increased investment in communications equipment to improve the availability of broadband wireless services: Governors, mayors, and federal officials, who have seen many reports of parents parking cars near fast-food restaurants and libraries so their kids can access Wi-Fi for remote classes, will make improvements in wireless broadband a priority, especially in rural areas.
- Stronger tech demand from governments, retailers, and small businesses but slightly weaker demand from financial services companies. Increased federal spending will allow both federal government agencies and state and local governments to increase their tech budgets by 5% or more. A revival of in-store shopping will cause retailers to step up their spending on integrated in-store and online retail management systems and supply chain management systems. And small businesses that had been slashing tech spending to survive will be able to shift to growth mode.