Investor's Business Daily
IT Spending On Pace For Record High
Monday March 29, 9:50 am ET
By Brian Deagon
Don't look now, but businesses are set to spend more money on technology this year than ever, eclipsing a record set in bubble-leading 2000.
U.S. businesses and government spent $468 billion on information technology in 2000, says the Bureau of Economic Analysis. They're going to beat that this year, and not just by pennies, but by $74 billion. So says Mat Johnson, chief economist at Quantit Economic Group, who's happy to go public with his bullish estimate.
"What's occurring is an outright acceleration in business IT investment," he said. "It's one consistent with offensive investing, or investing in future profits rather than past preservation."
His $542 billion forecasts exceeds the half-trillion-dollar level for the first time. And the 17% growth rate is reminiscent of the go-go years of 1996-2000, which most analysts have said would not return.
Last decade, business IT spending rose an average of 11% per year. The 2001 tech wreck resulted in a 10% drop, according to several sources. Most sources say IT spending was flat in 2002 and up 3% or 4% in 2003. Spending began to inch upward in the third quarter of 2003, say trackers, but most hesitated to predict a full-blown recovery was under way. Now, many are taking that step.
Johnson is among the most optimistic, as is Precursor Group, which also sees tech spending breaking through 2000 levels.
Other recent forecasts from International Data Corp., Gartner Inc., Goldman Sachs Group and Merrill Lynch & Co. are also more upbeat than at any time since before the tech bubble burst. IDC, though, doesn't see new spending records until 2006.
Their numbers all differ because of how they collect data.
Several tech-spending surveys are based on information provided by senior company executives. Given that many of these executives were scorched for providing overly optimistic guidance as the bubble was bursting, says Johnson, they now tend to be overly cautious.
"A lot of them are giving guidance based only on their backlog of orders," he said. "I think that understates the reality of what's going on.
"Right now they have order backlogs of about 8%-10%, and that's what they are telling us about growth. But that understates the kind of growth you are seeing at Intel, Texas Instruments and Dell."
Johnson's outlook is based on actual spending data, which Quantit then annualizes. Data from one quarter is multiplied by four to get a full year's outlook. It's done this way for each new quarter in order to balance out the peaks and valleys of orders and shipments. It's a technique used by many economists. He includes several other economic indicators to complete his results.
Some other surveys, he says, also don't fully capture spending by small and midsize businesses, or by government. This group accounts for half of tech spending and fueled most of last year's increase, he says.
"Large firms have been last to get going because their financial positions have not been as good as the smaller businesses," said Jaime Roca, an analyst at the Precursor Group, a research firm. "They were hit harder by the recession, and there is still some hangover from the tech bubble."
Precursor began to see growth in big-business IT spending in August. In the fourth quarter, corporate spending on IT rose 15% from the year-ago quarter, it says.
For 2004, Precursor see growth of 8% to 11%, to about $415 billion, more than its record tally of $402 billion, set in 2000.
Precursor's estimate lags Quantit's by $127 billion in part because Precursor excludes some office equipment it considers to be nontech.
IDC puts U.S. IT spending at $394.3 billion this year, up 6% from last year.
"Things are gradually getting better," said IDC analyst Stephen Minton. "But it still looks as though the IT recovery is lagging the economic recovery. In the past, IT spending correlated with corporate profits, which are doing better than IT spending."
In any case, no one predicts declining IT spending.
"What you're likely to see this year is a more aggressive posture by companies to update their systems rather than just maintain what they already have," said Johnson.
He sees three reasons for this.
One is that companies have been showing profit growth for several quarters and are looking to accelerate revenue growth at a faster clip.
A second reason is that companies have taken advantage of tax savings from laws put into effect after 9-11 that let them write down the cost of their equipment faster than before.
Pollsters say businesses are starting to spend again on cutting-edge technology, such as customer relationship management software. Spending also is up for laptop computers, used by sales and service staff out of the office.
And a survey of chief information officers by Goldman Sachs shows Linux-based servers gaining steam.
A survey of 956 CIOs by Gartner says companies continue to stress security and cutting operating costs. In its latest annual survey, there was a marked jump in the number of respondents saying they will invest in technology to boost revenue growth. Still, 70% said they are investing to maintain competitiveness, rather than to get ahead.
"Their mantra is pay as you go," said Mark McDonald, Gartner group vice president. "It's no longer do more with less." |
