Tech Sector Set For Mixed Bag

A new report on the information technology sector provides a mixed assessment of the industry's health.

On the plus side, the U.S. information technology sector is back from the recession of 2001, according to the first Forrester/ITAA US Tech Sector Index, introduced Monday by Forrester Research and the ITAA.

However, business in 2006 is expected to fluctuate, then experience a mild downturn in 2007. By 2008, the sector should experience another strong wave of innovation and investment,

"Any suggestion that IT is yesterday's news, doesn't matter, or has lost its edge as an economic driver is just plain wrong," Harris Miller, president of the Information Technology Association of America, said during a telephone conference Monday. "IT spending appears to be at the crossroads of good but not yet great."

The report aims to provide the most comprehensive view of U.S. tech sector health. The quarterly report shows that the U.S. tech sector climbed steadily from 2003 to 2005, mostly reversing declines from 2001 and 2002.The report's creators said it is the first of its kind. It contains measures, based on 11 evenly-weighted indicators, including CIO spending outlooks, U.S. technology exports, venture capital funding, employment, and vendor revenues.

Miller said that the "bubbly days" of double-digit growth and instant 20-something millionaires are gone, but "tech is back." "It's back older, wiser and in many ways more important than ever to businesses and the American economy," Miller said.A general recession, rising energy prices and inflation could produce a drag on the tech industry, according to Forrester. "Next year's looking reasonably good, but ultimately with a lot of question marks," Forrester Research Analyst Andrew Bartels said during the teleconference.

According to the report, the U.S. tech sector experienced a slight dip in the first quarter of 2005, then rose 3.9 points, almost matching a three-year high in the third quarter of 2005. It concludes that demand, CIO confidence in health of budgets and spendingshot up, while exports and revenues from U.S. buyers grew modestly.

Stock price measures represented the largest gains. Revenues for U.S. based IT vendors were stronger than those in Europe and Asia. Hardware prices declined as data density continued to rise.

Demand for IT in the U.S. is stronger than supply, with imports and offshore accounting for most of the gap, according to the report. Still, the third quarter decline in supply was much smaller than those in previous quarters. This may point to stronger funding for technology in the future, according to Forrester.Supply measures receded but exceeded expectations. IT employment rose to its highest level since the last quarter of 2003, with 15,500 new tech jobs, according to the report. Venture capital was down slightly, mirroring third quarter trends during the past three years.

Demand is expected to fall during the fourth quarter of this year. Forrester's outlook for business investment fell, and early predictors anticipate a drop in CIO confidence during the fourth quarter of 2005. U.S. enterprises expect smaller budget increases for 2006 compared to 2005.

Forecasters expect a "saw-tooth" pattern next year and a mild downturn in 2007. The next wave of tech innovation and heavy IT investment will arrive in 2008, according to the report.

Forrester surveys more than 11,000 business and IT executives across North America, Europe and Asia each year.