New Tech Index Shows Slower Growth In 2006

After a strong third quarter, CIO confidence appears to be modestly declining--and that could result in smaller budget increases in 2006, according to a joint survey released Monday by Forrester Research and the Information Technology Association of America (ITAA).

The two groups have partnered on the first quarterly U.S. Tech Sector Index, which measures the industry back to 2002, using their respective research findings. The index, based on Forrester's 11,000 survey responses from IT and business decision makers, measures 11 indicators based on demand (CIO spending outlooks and technology exports), supply (venture capital funding and IT employment) and strength of 22 domestic IT providers based on revenues and profits.

The apparent drop in confidence comes after a strong third quarter. Overall, Forrester and the ITAA see demand fluctuating in the upcoming year.

"We are seeing a cautious outlook," said Andrew Bartels, a senior research analyst at Forrester, who was joined by Forrester chairman and CEO George Colony and ITAA president Harris Miller on a conference call to announce the survey.

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Despite the slowdown, the three said the index is showing strong long-term growth, with no visible prospects for any measurable downturn.

"The U.S. tech sector has recovered from a 2001 to 2002 recession," Miller said. The third-quarter index came in at 121.6, up 3.9 points over the last quarter, and 5.5 points year-over-year. The figure is rated based on 100, which counts the entire calendar year of 2002.

The third-quarter surge followed a decline in the first half of this year, which followed a strong 2004. This quarter's jump was primarily driven by demand, while exports and revenues grew modestly, the index shows. Prices for hardware declined and will continue to do so.

The cautious outlook is the result of uncertain economic factors that could affect business in the coming years, including overall gross domestic product, the housing market and energy prices, Bartells said.

"If the GDP is below 4.0, there will be a fall-off in tech," Forrester's Colony said.

What about 2007? "We are fearing a general recession to hit tech," he said.

Into 2008, however, the index promises to show strong growth--upward of 9 percent--resulting from next-generation computing, Miller said.

"Longer term, we see a new period of innovation," he said. "I think it's fair to say that tech is back, but it's older, wiser and more important to the U.S. economy."