Guild Companies

In one way or another, salaries are all tied to what goes on in the world economy, and things are starting to look up. Don't go overboard when I tell you this, but the indications on Wall Street, as well as on Main Street, are that the economy might be pulling itself off the mat after being pinned for two and a half years. With a rebound in the economy will come the inevitable and understandably wary optimism that might even cause a sustained, slight uptick in IT spending.

The Commerce Department said last Thursday that the U.S. economy, as measured by gross domestic product, grew by 3.1 percent. The government economists, knowing that the economy only grew at 1.4 percent for both the first quarter of 2003 and the last quarter of 2002, didn't have high hopes for the second quarter of 2003, which they initially forecast to grow at 2.4 percent. Seven-tenths of a percent may not seem like a big difference, but it is huge when people are jumping. Some people will say that low inflation rates, low interest rates, and the Bush tax cut have kept consumers confident enough to keep spending through the recession, and they are spending at an increasing rate. What no one is saying is that many consumers can afford to do this because they are refinancing their homes at an astonishing rate and are using the money to remodel and pay off debt and to acquire new stuff. In many regions of the Western world, the real estate bubble has not yet burst, and if we are lucky, maybe it won't.

The department said that business inventories in the United States were way down, as companies were pessimistic in their future planning and therefore did not have a lot of finished goods stacked up in their warehouses. Speculation that the U.S. economy might grow by 5 percent or more in the third and fourth quarters of 2003 will probably put a cautious spring in the steps of chief executives across the land. Commerce said that spending on capital equipment and software rose by 8.2 percent in the second quarter, higher than the 7.5 percent growth it had expected. Unemployment is still at a decade high, running at 6.2 percent. The world's political situation is a mess, too. Both of these militate against any optimism you might feel in reading those statistics. At least it does for me. But the people I talk to in the computer business say that things are tough--very tough--but are improving.

Wall Street brokerage house Merrill Lynch is seeing similar trends as it tracks the technology sector. Steven Milunovich, who watches the big IT players for Merrill Lynch, said in a report last week that orders for technology products (that's hardware, software, and services) were up by 9.3 percent in July, the highest level of growth since September 2000. Computer products were up, and telecommunications products were faltering. Milunovich said that a capital-spending rebound might be in sight, given that July and August are usually weak, and July was pretty good. If there is an uptick in the last quarter of this year, it will be welcomed, especially after four years of IT executives predicting an uptick in spending in the second half. What I have seen in the past four years is untold numbers of companies going bust in the second half, and the new year starting with something that sounds more like a whimper or an exasperated sigh than an exciting bang. (Here's to hoping 2004 is better.)

That one is like a broken record, and that is why no IT executive wants to go on record in predicting an upturn, even if there is one. Intel's CEO, Craig Barrett, raised his company's revenue projections for the third quarter by $300 million to $400 million, with the expectation that Intel will book $7.3 billion to $7.8 billion in total sales. But Barrett, who was touring an Intel plant in Malaysia last week and was opening a new plant in China, told the Wall Street Journal that Intel would continue to be very conservative in its forecasts and that it was too early for anyone to say there is a recovery in IT spending.

The folks over at IT consultancy Aberdeen are less pessimistic. Analysts Hugh Bishop and James Tsai released a report last week saying a recovery in IT spending was gaining strength. Aberdeen looked at the financial results of the top 20 IT suppliers to come to this conclusion. Aberdeen's numbers show IT product sales at the top 20 dropping by about five percent per quarter, beginning in the fourth quarter of 2000, with a big contraction in the third quarter of 2001. Growth since that time has been a few points a quarter, with one minor dip in the last quarter of 2002. In the second quarter of 2003, the top 20 saw sales go up (in aggregate) by 6.1 percent year-to-year, and were even up sequentially by 3.6 percent.

Aberdeen says that long-term IT spending will increase by 4 to 6 percent, and that while growth may spike higher than this for a quarter or so, such big growth will not be sustainable. This seems very reasonable. There is still a lot of shaking out and consolidation to come in the IT industry.

Over at Gartner, analysts who track IT spending said in a report last week that there were early signs that IT spending will strengthen in the second half of 2004. Gartner said that improving conditions in the second half were a necessary precursor to a better 2004. Gartner does a weekly poll on the IT spending plans of its 20,000-strong customer base to track how much dough IT organizations are spending against their budgets. Gartner takes the survey data and builds an index, which is a measure of the percentage of their budgets they have spent on a particular IT category or across all categories. In March and April, the overall IT spending index was in the range of 80, meaning that companies were leaving 20 percent of their budgets unspent. In May and June, this index was above 90, and in July it was 95.1. Spending on hardware was just under 90 in the July survey, and was above 107 for software. Gartner says that it expects IT spending will return to or exceed budgeted levels by the fourth quarter.