Forrester says IT spending up in '08, but cautions on '09

Despite turmoil on Wall Street, U.S. spending on IT will increase more than previously expected, though the outlook for 2009 is dimming, Forrester Research said Wednesday.

The slowdown that Forrester, as well as many other analysts, forecast would hit in the first half of 2008 is now expected to occur in the second half of the year and the first half of 2009.

The economic slowdown will not completely blow away IT budgets, however.

"The tech market is not declining," said Andrew Bartels, vice president and principal analyst at Forrester. "This is not a replay of 2001/2002."

The market research company has revised its projections for 2008-09 U.S. IT spending growth, however. Forrester now says spending will grow at 5.4 percent from last year, up from its May projection of 3.4 percent. Meanwhile, its forecast for 2009 calls for 6.1 percent growth, down from its previous forecast of 9.4 percent.

In absolute terms, U.S. spending on IT will hit US$572 billion this year and US$606 billion next year, Forrester says.

This month's implosion of investment banks including Lehman Brothers and Merrill Lynch will have some effect on IT spending, but what is more worrisome is the general economic climate, according to Bartels.

While the financial sector as a whole accounts for about 18 percent of U.S. spending on IT, Wall Street, including investment banks, accounts for about 6 percent to 8 percent, Bartels said. While that is still a large slice of total IT spending in the U.S., the failure of several large banks, however big they are, is not enough to cause even that portion of IT spending to disappear, Bartels noted.

When Merrill Lynch is absorbed into Bank of America, for example, the money Merrill was spending on IT will not vanish, Bartels said. "There may be certain trading systems that will need continued support, for example," Bartels noted.

And as pieces of Lehman are sold off, the same holds true, as some of the bank's IT systems continue to be supported at the acquiring companies.

But the bank failures do have a ripple effect, he said. "The banking crisis exacerbates the stresses and strain on the rest of the economy," Bartels said. As credit markets tighten up, for example, it becomes harder to borrow money for corporate capital expenditures. As it also becomes harder for homeowners to borrow money, consumer spending can be affected.

Forrester expects growth in IT spending to slow down in the fourth quarter of this year and the first half of 2009, and then pick up again. "We expect growth of 1, 2, or 3 percent for a few quarters," Bartels said.

Growth in spending on PCs and peripherals will decline from 5.5 percent last year to 2.5 percent this year, and bounce back to 6.6 percent growth in 2009, Forrester said. Spending growth on communications equipment will increase from 4.8 percent last year to 6 percent this year, and decline to 3.7 percent next year. Software spending growth will decline from 11.9 percent last year to 7.1 percent this year and hit 7.9 percent next year. Growth in spending on IT services, not including outsourcing, will increase from 5.1 percent last year to 5.8 percent this year and 6 percent in 2009.

IT purchases can not be postponed indefinitely, Bartels noted. The total U.S. spending on IT in 2010 should increase by 10.1 percent, Forrester said.

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