Tech Spending Shows Signs Of Life

Has the long-awaited tech turnaround finally started?

No one is predicting a return of the double-digit growth rates of the late 1990s, but there are signs of life in what has been a comatose IT industry.

The latest positive news came Monday from market researcher IDC, which predicts IT spending in the United States will increase 1.5% this year over last year to $372 billion. During the next five years, it says, spending is projected to increase at a modest compound annual growth rate of 4.9%, reaching $467 billion by 2007.

Worldwide, IDC predicts that tech spending will rise 2.3% this year to $871 billion. IT researcher Aberdeen Group is projecting a spending increase of as much as 3.9% globally.

While it's unlikely IT vendors will pop the champagne cork, the numbers aren't bad when you consider the industry's 6.2% contraction over the last two years combined. "It's not a free fall any longer," Aberdeen analyst Hugh Bishop says.

Investors also appear to be feeling better about technology. Bellwether companies such as Dell Computer, IBM, and Intel have seen their stock prices rise during the last few weeks. In addition, the Merrill Lynch 100 Technology Index has risen 11% since Jan. 1, far better than the Standard & Poor's 500 index, which has increased only 5%.

"We do think it looks to be cautiously a little bit better," Bishop says. "Clearly, profitability has improved for many of the bigger suppliers, and revenue seems to be holding relatively steady."

Nevertheless, while spending is "very flat" this year, there's a lot of sales potential for IT vendors able to tailor their products for specific vertical industries, IDC analyst Anne Lu says. "When you look at IT spending, you notice there's a lot of interesting things going on," she says. "Some industries are experiencing an IT spending decline, while some others are more dedicated to ongoing IT investment."

Indeed, government spending is expected to be healthy over the next five years to meet initiatives for E-government and homeland security, IDC says. E-government is the goal of federal and state agencies to give citizens and businesses access to services via the Internet.

Discrete manufacturers, which assemble ready-made components and subsystems into larger products, are also expected to post the largest increase in spending as they look to technology to add cost-cutting efficiencies.

Overall, the manufacturing and financial industries are expected to account for almost half of IT spending, IDC says.

However, other industries will dampen overall spending. The telecom industry, for example, is still suffering from overcapacity, while the networking industry will take years to recover from its binge spending in the 1990s.

"We believe the communications market in 2004 will still experience a decline," Lu says. "But even though the industry will see negative spending, there's still an opportunity for IT vendors." While spending will drop, the communications market is expected to spend $22 billion in IT this year.