Aberdeen Group assesses the damage

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Will fourth quarter technology spending fall? As a component of business investment, technology spending has been caught in the back-swing of the recent macroeconomic downturn. The good news is that in the next 12 months IT spending will rise, although initially it will be a cloudy landscape.

The back-swing
When examining the technology industry in relation to the domestic economy, there's a quote worth repeating: "As goes the health of the domestic economy, so goes the health of the information technology (IT) industryÉ. in spades".

In short, the technology market is heavily and directly dependent on the health of industries that look to utilize it. During the last several years, there has been a clear correlation between GDP growth and the patterns of business fixed investment in equipment and software.

With regards to technology spending, AberdeenÕs central thesis is that as corporate revenues and earnings increase, a corporationÕs propensity to spend on technology and related business fixed investments will also trend upward.

Examining the climate
It should also be noted that the reverse is true. Therefore, if technology spending is linked to the general economic health of corporate and governmental entities, it cannot be looked upon as an exogenous, unlinked component of the domestic economic system. In an effort to understand where technology spending is likely to trend over the short and intermediate terms, we need to examine the macroeconomic climate.

A closer look
Economic growth has been virtually flat this year. During the last three quarters, a decline in capital spending and inventory liquidation by businesses has prevented growth, but consumer spending has served to provide just enough support to prevent an arrant economic downturn or recession.

Moreover, prior to the September 11th events in New York City, better news had begun to surface: Inventory levels had begun their arduous journey of retreating to levels that appeared to be under control, and new orders indicated that a turnaround in manufacturing activity was in the making.

Additionally, federal tax cuts and rebates were well poised to provide the wherewithal for growth in consumer spending. In short, the fundamental underbelly and inner workings of the U.S. economic machine appeared to have become well positioned for traction in the months ahead.

However, with the recent events in New York City, one nagging question emerges, "What impact will the tragic events of September 11th have on the economy of the worldÕs 800-pound gorilla?"

Consumers hold the key
In the short-term, the strength of consumer spending is the key element to a revival of economic growth and will serve as the economic life raft in the coming months.
www.aberdeen.com

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