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IT Recovery Is Tepid, As Expected

With a sharp decline in the global equity markets over the past month, economic uncertainty continues to plague IT spending, though some leading analysts and suppliers indicate the worst may be over.

• By Jeffrey Schwartz
• 02/05/2010

The economy declined 2.9 percent last year, according to the Bureau of Economic Analysis, which tracks gross domestic product (GDP). The 2009 annual GDP decline was the biggest drop since 1946 at the end of World War II. Keeping it from showing an even sharper decline, the final quarter showed a GDP surge of 5.7 percent growth.

In another encouraging sign, the U.S. Labor Department today said the unemployment rate dipped to 9.7 percent from 10 percent in December.

Economists are predicting a gradual improvement this year. Many see the IT industry poised to rebound stronger than others, incremental as the rebound may be. So far early indications of that optimism appear on target.

After one of its worst years in history, Microsoft last week reported a 14 percent increase in sales for the quarter ended Dec. 31 buoyed  by sales of Windows 7 licenses, though enterprise revenues remained lackluster. Meanwhile, Intel last month reported a 28 percent year-over-year increase in revenues for the same period with revenues of $10.6 billion. Cisco Systems Wednesday said revenues of $9.8 billion were up 8 percent for the quarter.

"Based on our business momentum and prior economic recoveries, this would indicate the recovery from a capital spending perspective is very strong, and moving into the second phase of a reasonably balanced across-the-board growth," Chambers said on Cisco's earnings call Wednesday.

"While the continued strength of the recovery and job creation may still be in question, we clearly are basing our decisions and investments on an optimistic evolution of the economy," he said. "If we get surprised we will adjust."

Though impressive, IDC analyst Stephen Minton points out that Cisco has been a beneficiary of huge investments by telecom and mobile operators. Overall IT growth remains tepid according to IDC, which Thursday said an overall worldwide increase in IT spending of 3 percent compared to an 8 percent decline last year.

Globally, hardware is predicted to grow 5 percent, software just 2 percent, and services 3 percent. PC and mobile device sales will continue to be robust, driven by consumer purchases, according to IDC. PC refreshes by enterprises are expected to start to pick up in the second half of the year. While virtualization is stifling server sales, both IDC and Gartner say it’s a key opportunity for growth moving forward.

Gartner forecasts growth of 4.6 percent, though it sizes the market at $3.4 trillion; IDC's estimate is $l.5 trillion. Neither firm sees IT spending resuming to a healthy pace until next year. "This year will clearly be better than last year and 2011 will be where we get back to normal for things like enterprise software," Minton said.

Stifling the recovery is the fact that small and midsize businesses (SMBs) don’t have access to capital as banks continue to tighten lending to the point where even businesses with strong cash flow and good credit are being locked out. In addition to impacting investments in IT, many small business solution providers are unable to hire, also putting a choke­hold on growth.

"Normally, SMB spending outpaces spending by big corporations, and we think that will start to happen again once we get out of 2010. But in the short term, the credit crunch is having an impact on those smaller firms in those mature economies," IDC’s Minton said.

Help on the Way?

In a move to get banks lending to SMBs, President Barack Obama proposed to Congress in his State of the Union address last week that $30 million be made available to give small businesses credit. The funding would come from the TARP money repaid by large Wall Street banks in recent months.

"Financing remains difficult for small business owners across the country, even those that are making a profit," Obama said in his address. The administration is also proposing a tax credit to SMBs that hire. Under the proposal, SMBs that hire new employees will be entitled to a $5,000 tax credit and will be exempt from paying Social Security taxes for the remainder of the year.

"This is a simple, easy-to-understand mechanism that will cut taxes for more than 1 million small businesses," Obama said in a speech at a Baltimore factory last week. "It’ll give them an incentive to hire more people and a little bit of extra money to pay higher wages, to expand work hours or invest in their company."

The proposals certainly should help, Minton says, but that’s not going to be an overnight fix, either. "We obviously hope it will have an impact over time, but it’s not going to instantly solve the problem, which those companies are facing today, which is having the capital to go out and spend on IT," he says.