July 5, 2018
At the midpoint in 2018, the US tech market is on track to grow by 6.7% in 2018, the fastest growth since 2012. In our just-published report, “US Tech Market Outlook For 2018 And 2019: Cloud Powers Tech Spend To 6% Growth And Software To 8% Growth,” we can provide strength in all tech budget categories, especially in software and services. However, 2019 is looking more uncertain, and we forecast that growth in US business and government spending on tech goods, software, services, and staff will slow to 5.5%.
Three factors are driving this strong performance for the US tech market in 2018:
- Stronger economic growth. After a slow start, US real GDP growth is likely to be around 4% in Q2 and almost 3% in the second half of the year. Inflation is also ticking up, lifting nominal GDP growth to over 4%.
- Expanding cloud adoption. Enough firms have adopted SaaS for applications and cloud platforms for data processing and storage needs that 20% to 30% growth rates in these categories are now showing up.
- New technologies, such as artificial intelligence, are causing firms to increase their tech spending overall in order to stay ahead of competition, even if the actual amount of spending on these new technologies is still too small to show up in our numbers.
In terms of focus of tech spending, firms are prioritizing investments in business technologies (BT) that help them win, serve, and retain customers and thus grow revenues. However, changes in front-office systems are starting to drive changes in back-office systems like finance, HR, purchasing, risk management, employee productivity, and core transaction systems. So while spending on BT-focused software and consulting services will grow at 8% to 10% rates in 2018 and 2019, spending on back-office-focused software and services will grow nearly as rapidly, at 6% to 8% rates.
While 2018 looks strong for the US tech market, we are worried about the 2019 tech market outlook. The benefits of the 2017 tax cuts will not be as strong; higher interest rates will start to take their toll; and the worsening potential for trade wars could bring disruptions in supply chains, loss of exports, and higher prices, not to mention hits to business confidence among manufacturers and retailers. As a result of these threats, we project that US tech spending will slow to around 5.5%, with the possibility of an even greater slowdown if the negative effects of higher interest rates and trade wars prove greater than we assume.